The euro rose 0.4% against the US dollar and was a mid-performer among G10 currencies. It was supported by market risk mood linked to the US/Iran conflict, even as German trade data weakened.
Yield spreads narrowed as expectations for ECB tightening eased. June is priced at 19 bpts, about 10 bpts below the peak after the 30 April policy meeting.
Options Markets Signal Shift In Euro Hedging
In options markets, risk reversals showed less demand for protection against euro weakness. Premiums may shift towards upside protection, as seen in late 2025 and early 2026.
German trade data weakened due to a rise in energy imports in March. The euro showed little reaction to the prospect of renewed trade tensions and tariff threats for 4 July.
Technically, EUR/USD held support in the mid-to-upper 1.16s near the 38.2% Fibonacci retracement of the Jan–Mar decline. It then moved above the midpoint at 1.1746 towards the 61.8% level at 1.1825.
The RSI was in the upper 50s, which pointed to positive momentum. The near-term range was set at 1.1720 to 1.1820, with scope to revisit the January high above 1.20.
Current Macro Backdrop Favors Caution
Back in the first quarter of 2026, we saw a bullish technical structure forming for the Euro, with analysis suggesting a potential push back towards the 1.20 highs seen in January. This view was supported by the pair moving above key Fibonacci levels and a rising RSI indicator. At the time, options markets also signaled fading demand for downside protection, which added to our confidence.
However, as of today, May 8, 2026, that upward momentum has clearly stalled as interest rate differentials have moved decisively against the Euro. Recent US non-farm payrolls for April came in strong at over 250,000, while last week’s Eurozone flash CPI missed expectations, printing at 1.9% and pushing back expectations for any near-term ECB rate hikes. This growing policy divergence means traders should now be cautious about further Euro strength.
For derivative traders, the environment has shifted from buying upside calls to considering strategies that profit from range-bound action or protect against a downturn. Looking at historical data from 2024, similar periods of policy divergence led to a multi-month decline in EUR/USD of over 5%. One-month risk reversals now show a renewed premium for EUR puts, a notable change from the sentiment observed in late 2025 and early 2026.
The recent German IFO Business Climate index also fell to a six-month low of 92.5, confirming that the weaker German trade data we saw in March was not an isolated event. Consequently, we believe selling call spreads with a strike above the recent high near 1.1980 could be a viable strategy. Traders should watch for a potential test of the 1.1720 level in the coming weeks.
