The EURUSD pair did not rally despite the US-EU trade deal, potentially due to market anticipation of the tariff rate. While the USD gained some ground recently, it lacked a notable catalyst. The market continues to range as traders await new developments for a sustained trend. The “short US dollar” remains a popular trade, requiring a meaningful catalyst to alter rate cut expectations.
The US-EU trade deal has reduced uncertainty on the EUR side. Several ECB members have adopted a neutral stance on further rate cuts, requiring negative data to consider more reductions. Despite market pricing around a 65% probability of a December cut, the ECB may hold rates given the trade deal, easing measures, and fiscal plans.
Technical Analysis Highlights
In technical analysis, the daily chart indicates key support at 1.1575, with potential for both buyers and sellers to impact price movements. The 4-hour chart shows a breach of minor support at 1.1720, suggesting a bearish sentiment due to expected trade details. The 1-hour chart offers limited new insights, focusing on resistance and support testing.
Upcoming US economic data, including job openings, consumer confidence, GDP, and employment figures, may serve as catalysts for market movement in the near future.
We believe the market is digesting the trade deal news, which was largely anticipated. With speculative net short positions against the dollar recently near multi-year highs according to CFTC data, the path of least resistance could be a further USD rally. A short squeeze could amplify any upward moves in the greenback.
On the other side of the pair, European officials are signaling a pause. Recent commentary from central bank members has emphasized that core inflation remains stubbornly above 5%, pushing back on market expectations for a near-term rate cut. The probability of a December cut has now fallen below 50% in the overnight index swap market, suggesting traders are repricing the bank’s intentions.
Bearish and Bullish Trading Strategies
For derivative traders with a bearish view, the former support level around 1.1720 now presents a prime opportunity. We would consider buying put options or establishing short positions if the price retests this area from below. This provides a clear area to define risk, targeting the key support mentioned near 1.1575.
Conversely, patient buyers should watch the 1.1575 level closely for signs of a bottom. Should the price fall to this significant support zone, we would look for bullish reversal patterns before purchasing call options. This strategy avoids trying to catch a falling knife and positions for a potential rally back towards the cycle highs.
The upcoming week is packed with high-impact US data that will likely decide the next move. We are watching for Wednesday’s FOMC decision and Friday’s Non-Farm Payrolls report, with consensus estimates currently around 170,000 jobs. A strong set of numbers would bolster the dollar and likely push the pair towards the lower support, while weak data could challenge the bearish momentum.
Historically, when positioning becomes as one-sided as the current anti-dollar trade, even neutral data can trigger sharp reversals. We saw a similar dynamic in late 2021 when crowded short positions were forced to unwind, leading to a multi-month dollar rally. Therefore, traders should remain nimble, as the catalyst for a move might not be obvious.
