The Euro has dropped to new lows, trading below 1.1580 ahead of the European Central Bank’s (ECB) monetary policy decision. The ECB is expected to maintain current interest rates for the third consecutive meeting, while Eurozone’s GDP showed a growth of 0.2% in the third quarter, surpassing the anticipated 0.1%.

Positive news from China-US trade negotiations failed to uplift sentiment significantly, with the Euro’s earlier gains being short-lived. The US Federal Reserve recently cut interest rates by 25 basis points, though future rate cuts remain uncertain, leading to a stronger US dollar. The European Economic Sentiment rose to 96.8 in October, exceeding expectations; consumer confidence remained steady.

Technical Analysis Drives Market Sentiment

In technical analysis, EUR/USD faced resistance around 1.1630, confirming a break below a triangle pattern at 1.1580. Support is highlighted at 1.1545, with potential downside targets at 1.1500 and 1.1450. The ECB’s decision on the rate on the deposit facility remains at 2%, and a press conference following the meeting may impact the Euro’s short-term trend.

With the ECB decision happening today, we are seeing a spike in short-term volatility in the EUR/USD. Traders should anticipate a significant price move following the press conference. Options strategies like straddles, which profit from a large move in either direction, could be useful to deploy just before the announcement.

The Federal Reserve’s hawkish stance from yesterday is providing a strong tailwind for the US dollar. By signaling a pause in rate cuts, the Fed has created a clear policy divergence with a potentially more cautious ECB. This makes bearish positions on the euro, such as buying put options on the EUR/USD, a compelling trade for the coming weeks.

Recent data reinforces this divergence, as the latest Eurozone flash CPI for October came in at 1.9%, remaining just below the ECB’s 2% target. Meanwhile, the most recent US Core PCE inflation data from September held firm at 3.8%, justifying the Fed’s reluctance to promise further easing. This statistical gap supports a fundamentally weaker euro relative to the dollar.

Historical Patterns Point to Sustained Weakness

We have seen this kind of policy divergence play out before, most notably in the 2014-2015 period when the EUR/USD fell significantly. That historical pattern suggests that the current environment could lead to a sustained downtrend rather than a short-term dip. This supports holding bearish derivative positions for more than just a few days.

The technical breakdown below the 1.1580 level is a clear bearish signal, opening the door to the 1.1545 support area and potentially the 1.1500 psychological level. We should see this as an opportunity to purchase put options with strike prices near these targets. The technical confirmation provides a solid entry point for a trade expecting further downside.

Since implied volatility is elevated right before the ECB meeting, buying options outright is expensive. A bear put spread would be a more capital-efficient way to position for a drop. For example, buying a 1.1550 put while simultaneously selling a 1.1450 put would lower the trade’s cost and define the risk.

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