During the second quarter, the euro emerged as one of the top performers among the G10 currencies. This was driven by bearishness towards the USD, deep financial markets in the Eurozone, and the euro’s status as the second-most held reserve currency.

The ECB has shown mixed signals regarding the euro’s strength. While some officials welcome the benefits of a stronger euro, such as improved financial conditions, the potential risks to competitiveness and inflation are often not fully addressed.

ECB Position on the Euro

There is no set definition for a “strong” euro, but recent comments imply that the current EUR/USD rates, predicted to stay near 1.10 until 2025–26, are acceptable. Credit Agricole’s projections indicate this rate is fair, but warns the ECB’s acceptance has boundaries.

If the euro continues to strengthen, there could be negative impacts on Eurozone growth and inflation. This week, market attention will focus on Eurozone data and ECB speeches to gauge any changes in stance.

Although the ECB seems content with the current exchange rate, Credit Agricole questions if this would remain the case should the euro appreciate further, potentially threatening inflation targets or growth recovery.

Markets have, in recent days, begun to price in a scenario where policymakers become more tolerant of the current euro level, particularly as headline inflation metrics drift closer to medium-term targets. We have seen this behaviour before: when monetary authorities detect comfort in the price action, volatility tends to subside, only to return when the long-term consequences begin to crystallise in economic data or index-level divergences. Earlier comments from Nagel and Schnabel, while not definitive, have added weight to the notion that the Governing Council is not yet feeling pressured by the currency’s strength. That said, we know from previous episodes that this tolerance can evaporate quickly if macro signals start to weaken.

Market Strategy and Caution

We interpret this as a warning—not through overt policy shifts, but through the absence of resistance. Market participants have short memories, and complacency, once embedded, is hard to unwind without market disruption. At current levels, the euro does not appear stretched—yet the premise hinges on core inflation remaining on its glide path and energy prices not experiencing another disorderly spike.

What we’re watching most closely is not whether officials speak supportively of the current range, but when they stop doing so. It’s the silences, not the speeches, that often hint at a shift in attitude. Particularly in summer months, when liquidity is thinner and volumes compress, moves that would otherwise be shrugged off can become disorderly, pulling forward responses that would otherwise remain dormant.

That is where caution becomes more valuable than conviction. Directional exposure should be managed with stricter premium thresholds and shorter tenors. Vega and gamma sensitivity rise in environments where policy ambiguity is reading as dovish persistence. If realised volatility starts to tail off, as it did during past policy holding patterns, then options pricing could become less supportive for implieds—raising the bar for profit on directional longs and rendering straddles less attractive.

The path forward now depends less on fresh statements and more on the drift of economic releases—particularly labour trends and sentiment gauges. If growth begins to meaningfully surprise to the downside, we anticipate early reactions not in rate policy, but in rhetorical hints aimed at reining in excessive currency strength. Beige tolerance disappears swiftly under pressure from exporters and peripheral sectors.

We’re also monitoring positioning data. If flow starts to favour euro upside in an unbalanced fashion, particularly from leveraged accounts, then the risk of a sharp reversal grows. Historically, these positions unwind quickly when the ECB suggests that growth—or a sustained miss on energy pass-through—warrants a weaker unit. Bonds have already begun to reflect this uncertainty through a subtle steepening in peripheral curves.

For hedgers, these next two weeks matter. Premiums remain affordable, but less so than they were a month ago. As implieds recalibrate to the more stable policy tone, longer-dated tenors may offer better value than weeklys, which have started to carry a hint of complacency. We prefer strikes that allow room for modest euro weakness against the backdrop of stable-to-lower rate differentials.

Let’s not forget: when policymakers seem content, it’s usually the time to prepare for a change. Opportunity, in our experience, arises not from confirmation, but from early dislocations before the broader market adjusts. Thus far, we’re moving within accepted ranges, but the conditions that make that acceptable are not static. They’re conditional, contingent, and—above all—finite. Timing matters less than discipline.

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