EURUSD initially rose after the core CPI landed lower than expected at 0.2% (unrounded 0.228%). The price reached a high of 1.1690, narrowly missing the 100 hour moving average at 1.16922. Sellers were active below this average throughout the day, with trading on Friday also pausing at this level.
Resistance at the 100 hour moving average is important for future movements. A break above this level with momentum may change the market’s bias from bearish to bullish.
Essential Swing Zone
On the downside, the range between 1.1663 and 1.1691 is an essential swing zone, noted from April to November 2021. The price fell below this zone several times, including earlier today. After the data was released, a low of 1.16616 was recorded, slightly under this range, before the price rebounded. While the 100 hour moving average is vital for resistance, staying below 1.1663 holds equal importance for downward movements.
We are seeing a classic battleground form in the wake of the recent US inflation data. The cooler-than-expected US core CPI, which came in at 0.2% for May, and the annual rate dropping to 3.4%, gave the Euro an initial, predictable lift. That surge, however, slammed directly into a wall of sellers right at the technically significant 100-hour moving average, a level that has repeatedly capped advances in recent trading sessions. This rejection underscores the market’s deep-seated uncertainty.
Strategy and Volatility
For derivative traders, this setup is not a signal to pick a direction, but to trade the tension itself. The divergence between central banks is becoming the only story that matters. While the Federal Reserve now has more justification to consider a rate cut later this year, the European Central Bank is facing its own challenge. Eurozone inflation recently ticked *up* to 2.6% in May, surprising consensus and complicating the ECB’s path after its recent quarter-point rate cut. This creates a powerful push-pull dynamic, pinning the currency pair in a tight range.
Our strategy, therefore, must focus on volatility. The implied volatility for EUR/USD options has been climbing, and we believe it remains underpriced given the conflicting fundamental pressures. We are looking at structuring long strangles, buying both an out-of-the-money call and an out-of-the-money put. This allows us to profit from a significant breakout in either direction, which we see as inevitable. The key is positioning this trade ahead of the next major catalysts, such as statements from central bank officials or the upcoming flash PMI releases.
Historically, periods of policy divergence, like the one we saw in 2014-2015 when the ECB embarked on quantitative easing while the Fed prepared to hike, are not smooth trends. They are characterized by violent swings and false starts before the primary trend asserts itself. On the downside, a definitive break below the critical swing zone, now established between 1.0800 and 1.0825, would be our trigger. A sustained move above the aforementioned moving average, especially if it coincides with a dovish Fed stance, would signal the opposite. Until one of these levels breaks decisively, playing the range is a fool’s errand; playing for the eventual, and likely sharp, break of that range is where the opportunity lies.
