The EURUSD dropped to session lows of 1.1702, dipping below the swing area low of 1.17109. It soon rebounded above the 100-hour moving average of 1.17334, with traders struggling to establish directional momentum.
A large number of option expiries at the 1.1700 strike influenced earlier downward pressure as traders neared the expiration price level. The price then briefly rose above the 100-hour moving average before returning to a broader swing area.
European Markets Close
As European markets closed, the EURUSD remained in a state of indecision. For the week, the low was set on Monday at 1.16142, providing a critical swing level for buyers. Thursday marked the week’s high at 1.1788, offering sellers resistance.
As the weekend approached, prices hovered near weekly highs, staying above the 50% midpoint of July’s trading range. A further decline would require breaking the 200-hour moving average at 1.1677 to increase a downward trend.
Based on the consolidation Michalowski describes, we believe derivative traders should prepare for a significant price break. The current tight range suggests low market volatility, which often precedes a large, directional move. Implied volatility in the EUR/USD one-month options market has recently fallen near yearly lows, making options pricing relatively cheap for strategies that profit from a breakout.
Market Positioning
The fundamental economic picture supports a potential downside move for the pair. Recent data shows US Q2 GDP grew at a surprisingly strong 2.4%, while business activity in the Eurozone, particularly Germany’s manufacturing PMI at a dismal 38.8, points toward a slowdown. This economic divergence typically strengthens the dollar against the euro over time.
We are also watching the differing inflation landscapes and central bank responses. While Eurozone inflation remains elevated at 5.3%, the European Central Bank may be forced to pause rate hikes due to the weak economy. In contrast, the Federal Reserve is dealing with resilient US economic data and may maintain a more hawkish stance to ensure inflation returns to its target.
Looking at market positioning, recent data from the Commodity Futures Trading Commission shows that while large speculators remain net long the Euro, they have been trimming their positions for several weeks. This indicates that conviction behind the Euro’s strength is fading, aligning with the price action struggling at key resistance levels. This reduction in bullish bets could accelerate a sell-off if key support levels break.
Therefore, we see an opportunity in buying volatility through strategies like long straddles or strangles, which would profit from a large move in either direction. For a directional view, buying puts with a strike below the 200-hour moving average at 1.1677 could be a way to position for a confirmed bearish breakdown. The key is to use the current low volatility environment to enter positions before the market’s “battle for directional conviction” is decisively won.
