Insights 
VT 
The Euro (EUR) is trading on a defensive note, dipping below 1.16, as it retracts some of Wednesday’s gains. Fundamental data is sparse, with Friday’s preliminary PMI figures on the horizon. Interest rate differentials provide some backing for the Euro, though their effect is currently limited.
Sentiment largely drives market movements, with a notable link to risk reversals due to political developments in France. The situation in France has stabilised, with the French-German 10Y yield spread steadying just below 80 basis points. This represents a settled state compared to the upheaval seen in late August.
Range And Momentum
The Euro is confined within a range, showing close to neutral momentum. The Relative Strength Index (RSI) is just below 50, and the 50-day moving average is flat at 1.1688, indicating a lack of strong trend since July. The current movement stays between last week’s low of around 1.1550 and the high in the mid/lower 1.17s, with an expected range between 1.1550 and 1.1650.
We are seeing the Euro trade defensively, but the landscape has shifted dramatically since discussions revolved around a 1.16 handle. With the pair currently struggling near 1.05, the market dynamics are entirely different. This ongoing weakness reflects the interest rate differential between a Federal Reserve holding rates steady and a more dovish European Central Bank.
As we look at the fundamentals, the latest HCOB Flash Eurozone Composite PMI reading of 52.1 shows a slight expansion, but this masks a persistent weakness in the manufacturing sector. Eurozone inflation has cooled to 2.2% year-over-year, moving firmly into the ECB’s target range. This contrasts with stickier US inflation, which is holding just above 3%, reinforcing the policy divergence that is weighing on the EUR/USD.
Trader Strategies In Current Environment
This environment suggests traders should consider strategies that benefit from either a continued grind lower or a firm cap on any potential rallies. We are seeing increased interest in buying EUR/USD put options to speculate on a test of the 1.04 level. Selling out-of-the-money call options or establishing bear call spreads could also be an effective way to generate income while defining risk.
We recall periods, like the political uncertainty back in 2024, where sentiment drove the market and sovereign yield spreads widened. While that specific risk has passed, it serves as a reminder of how quickly non-economic factors can dominate. Today, the market’s focus remains squarely on the economic divergence between the US and the Eurozone, which is the primary driver of currency direction.
