EUR/USD began the week with a bullish gap, as optimism over a possible US-Iran peace deal pressured the safe-haven US Dollar. The pair moved back towards the mid-1.1600s in Asia, rebounding from last Thursday’s 1.1575 low, its weakest level since 7 April. Even so, the broader tone remains cautious, with hawkish US Federal Reserve pricing seen as a potential cap on further USD softness.
Technically, the pair is holding above the 23.6% Fibonacci retracement of the April–May decline. Momentum indicators lean constructive, with the RSI around 58 and the MACD slightly positive, supporting scope for further intraday gains. Resistance is seen at the 38.2% level around 1.1675-1.1680, followed by 1.1710, where the 200-period SMA on the four-hour chart converges with the 50% retracement; a break above would open 1.1740 at 61.8%, then 1.1785 at 78.6%, and potentially 1.1842. Support sits at 1.1638 and then 1.1574; a drop through the latter would revive the bearish phase.
Short-Term Opportunities and Geopolitical Influence
Given the bullish gap in the EUR/USD at the start of this week, we see a short-term opportunity based on renewed geopolitical optimism. The potential for a US-Iran deal is currently weighing on the dollar, pushing the pair back towards the mid-1.1600s. However, this sentiment could be fleeting, so we are approaching this with caution.
The primary conflict for this currency pair is the hawkish Federal Reserve versus shifting market sentiment. With the latest US Consumer Price Index (CPI) report showing core inflation at a stubborn 3.1%, the market is still pricing in the possibility of another rate hike by the end of the third quarter. This fundamental pressure should limit significant dollar weakness and cap the euro’s advance in the coming weeks.
Trading Strategies and Outlook for EUR/USD
For those looking to trade the immediate upward momentum, we believe buying short-dated call options is a viable strategy. We are targeting weekly or bi-weekly options with a strike price near the 1.1710 level, which represents a key technical confluence. This allows us to capitalize on a potential quick rise while defining our maximum risk.
However, we view the 1.1710-1.1740 area as a formidable ceiling for any rally. As the pair approaches this zone, we would consider initiating bearish positions, such as selling call spreads, to profit from the likely rejection. This strategy aligns with the broader economic data that favors a stronger dollar over the medium term.
If the immediate bullish momentum fails and the price breaks below the 1.1600 handle, we would see this as a trigger for further downside. The divergence between the Fed’s stance and the European Central Bank, which saw Eurozone HICP inflation fall to 2.4% last month, supports a longer-term bearish outlook. A break of the 1.1574 floor would prompt us to buy puts with expiries in late June or July.
The current environment suggests an increase in volatility is likely as geopolitical headlines clash with economic data. The Cboe EuroCurrency Volatility Index (EVZ) has ticked up to 8.5, reflecting market uncertainty. Traders should be prepared for sharp, two-way price action and manage their positions accordingly.
