The EUR/USD is currently struggling after a recent drop. The pair was expected to correct, but it has already reached a forecast of 1.15.
Over recent months, EUR/USD experienced an over-extended rally. Market data indicates a current short position on USD while remaining long on EUR, which could lead to USD favouring short-covering.
Eurozone Economy
Despite the recent softness, EUR is among the better-performing G10 currencies, appreciating by nearly 6% against the USD since mid-March. Germany’s fiscal policies are seen as stimulating the Eurozone economy.
Europe relies on the US for NATO support, particularly considering the situation in Ukraine. Uncertainties around energy costs and trade agreements pose challenges to European exporters.
A strong EUR is not ideal for European exporters. A softened EUR is projected in the coming months, with expectations of Fed rate cuts in 2026, leading to a potential rise in EUR/USD within 6 to 12 months.
The information shared involves risks and should not be taken as financial advice or recommendations. It is advised to conduct thorough research before making investment decisions, recognising the risks and responsibilities involved.
Market Positioning
We see the EUR/USD pair is finding it difficult to stay above the 1.15 level after its significant run-up. The rally since mid-March of this year seems overextended, and the conditions are ripe for a downward correction. With the pair having already met its forecast, we should be cautious about further upside in the immediate term.
Looking at market positioning, we see a crowded trade with many speculators holding long positions on the Euro and short positions on the US Dollar. The latest Commitment of Traders report shows these speculative long Euro positions are near their highest levels for 2025, suggesting a high risk of a quick reversal. This crowded positioning often leads to sharp moves as traders are forced to cover their bets, which would favor the dollar.
A Euro at these levels is not helping European exporters, especially with uncertain energy costs heading into the winter. We have seen in past cycles, like back in the late 2010s, that a rapidly appreciating Euro can lead to verbal intervention from European Central Bank officials. Therefore, we should consider strategies that profit from a potential decline, such as buying put options.
Given this outlook for the coming weeks, we believe traders should consider positioning for a weaker EUR/USD. This could involve buying put options to bet on a drop below key support levels, perhaps targeting the 1.1350 area initially. Selling call options or establishing bear put spreads could also be an effective way to position for a decline while managing the cost of the trade.
However, we must remember that this bearish view is for the near term. The prospect of the Federal Reserve starting to cut interest rates in 2026 creates a floor for how far the EUR/USD might fall. Any short-term trades should have a clear exit strategy in place before that long-term narrative takes over the market.
