Insights 
VT 
The Euro (EUR) rose to the low 1.17 area overnight before easing slightly. The USD faces challenges due to trade issues, rate concerns, and sentiment changes, while there is hope for the Ukraine war to end with an anticipated meeting between Trump and Putin in Budapest.
Eurozone and US interest rate differentials at the 2-year sector have returned to the level of -150bps, previously seen when the EUR was around 1.19. This suggests the EURUSD should maintain support on declines. Although the EUR has slightly retreated from its intraday peak, indicating a potential short-term high, the weekly gain forms a bullish ‘piercing line’ pattern, suggesting a positive longer-term outlook.
Risk Of Eur Drifting Lower
There is a risk of the EUR drifting lower in the short term. However, support is likely to appear on dips to the low/mid 1.16s. The information presented is compiled by the FXStreet Insights Team, featuring observations from market experts and additional insights from various analysts.
We are seeing the Euro pull back from its recent highs near 1.15, but the underlying support for the currency appears strong. The primary driver is the shifting interest rate outlook, as the US Federal Reserve has now paused its rate cycle while the European Central Bank is signaling one more hike before year-end. This is creating fundamental challenges for the US dollar, similar to dynamics we have observed in the past.
This situation mirrors the dynamic we saw back in mid-2018 when a narrowing 2-year yield spread helped lift the Euro. Today, that spread has inverted, with German 2-year yields at 3.25% now trading above their US counterparts at 3.10%, a direct result of recent Eurozone HICP inflation holding firm at 3.4% while US CPI has fallen to 2.8%. Given this backdrop, any dips in the EUR/USD pair are likely to be viewed as buying opportunities.
Trading Strategies For The Euro
For traders, this suggests that selling out-of-the-money EUR puts with expirations in the coming weeks could be a strategy to capitalize on this support. Look for support to emerge in the low to mid 1.13s, providing a solid base. The premium collected from selling these puts offers a way to profit if the Euro remains stable or moves higher, reflecting the view that the downside is limited from here.
While the long-term weekly chart is forming a bullish pattern, much like the one we noted years ago, short-term volatility is a risk. Implied volatility in the options market has ticked up to 8.5% following last week’s weaker US retail sales report. Therefore, traders might consider using bull call spreads instead of buying calls outright to reduce the upfront cost and define risk in case of a sharper, unexpected dip.
