The Euro pulls back from three-week highs after hopes for an EU-US trade deal, including 15% tariffs, were tempered. The European Central Bank (ECB) is anticipated to keep rates steady but may imply potential easing in the future. Despite strong Eurozone PMIs, the EUR/USD pair is losing gains as positions are adjusted before the ECB decision.
The Euro is trading around 1.1750, down from a three-week peak of 1.1780, post-trade deal news. The US Dollar’s safe-haven appeal is under pressure in risk-on markets, maintaining the Euro’s short-term upward trend.
Eurozone And US Trade Deal Developments
EU and US negotiators have reportedly aligned on a deal with 15% tariffs on Eurozone goods, sparing aircraft and other select items. This measure aims to avoid the 30% tariff previously mentioned by President Trump and potential EU retaliations that could lead to a trade war.
Eurozone data are mixed, with the German GfK Consumer Confidence Survey indicating continued economic weakness, offset by better-than-expected PMI figures. Upcoming US Initial Jobless Claims and PMIs are set to provide further context. The ECB’s unchanged rate announcement will be a focal point, offering clues on future policy moves.
The Eurozone preliminary PMI showed a slight uptake in manufacturing activity, while the services sector outperformed forecasts. Meanwhile, German consumer confidence weakened, missing expectations.
US Economic Indicators And The Eurozone
In the US, S&P Global PMIs for services and manufacturing are projected to rise, reflecting robust economic activity. The EUR/USD pair remains volatile, with technical indicators signalling potential corrections amid profit-taking ahead of the ECB’s decision.
Support levels for the pair stand at 1.1740, with possible resistance at 1.1790 and longer-term highs at 1.1830. The ECB’s Deposit Facility Rate remains at 2%, with future policy directions eagerly awaited by markets.
We see the Euro’s pullback from its recent high as a signal to reassess positions, with the market’s focus shifting away from the potential trade deal mentioned by Mr. Trump. The primary driver now is the divergence in central bank policy. This change suggests that any strength in the pair may be temporary and presents an opportunity.
The European Central Bank’s recent commentary has opened the door for rate cuts as soon as June, a view supported by over 80% of economists in a recent Reuters poll. Implied volatility in the currency pair has been elevated, meaning options are more expensive, which signals that the market anticipates bigger price swings. We believe this environment is ripe for strategies that can profit from either a directional move downwards or a decrease in this priced-in uncertainty.
The economic data supports a cautious stance, with the latest German GfK Consumer Confidence falling to -29.7, its lowest point in months. While Eurozone PMI data showed a slight uptick to a six-month high of 47.9, it remains in contraction territory below 50. Historically, when the ECB has signaled a pivot to easing before the U.S. Federal Reserve, the EUR/USD has entered a period of sustained weakness.
Given the strong resistance near the 1.1790 level, we are considering strategies like purchasing put options or establishing bear put spreads. These positions would profit from a decline in the EUR/USD, offering a defined-risk way to speculate on the currency weakening due to future policy easing. This approach allows us to capitalize on the fundamental headwinds facing the Euro.
For traders who believe the pair will be pinned in a range while the market digests information, selling out-of-the-money strangles could be effective. This strategy involves selling both a call and a put option, collecting the premium from the high implied volatility. The position profits as long as the currency pair remains between the two strike prices through expiration.
