1.12 becomes the front line for the euro – defending positions, not chasing highs

A Challenging Week for Euro Bulls

The long-term narrative remains intact, but confidence is starting to wobble amid short-term uncertainty, technical exhaustion, and position rebalancing.

Latest Pressure Comes from Trade Tensions

The countdown to Trump’s 50% tariff threat against the EU is on — with only six weeks to go — and markets are beginning to digest a scenario where Europe is increasingly isolated while U.S. policy turns more targeted toward the eurozone versus other regions.

Tariff Delay Gives Traders Room to Ignore Risk

The still-weak dollar offers a reason for complacency. But as a potential U.S.–EU clash draws nearer, the euro might not benefit as much as it did in previous trade cycles. If the currency becomes a direct policy focus, an entirely new market dynamic could emerge.

Month-End Noise Adds to the Complexity

We’re also entering the usual month-end market noise, which complicates the euro’s path higher. Real-money flows are expected to sell dollars, supporting the euro. But corporate euro selling is also present, with some desks warning that month-end flows may not be as pro-euro as anticipated.

Price Action Confirms It

EUR/USD is pulling back toward 1.13, and interbank traders note a lack of appetite to chase strength above 1.14. Most prefer buying dips around 1.1250–80, still seen as attractive for short-dollar exposure. Sentiment remains euro-positive, but momentum is lacking. A close below 1.12 would significantly damage confidence.

Hedge Funds Have Already Cut Long Exposure

CFTC data shows the largest net short position since mid-March. However, this also reflects existing long option exposure — whether via call spreads or more complex structures like topside exotics.

Exhaustion Also Shows in Options Market

One-year risk reversals hit new cyclical highs last week, but have since re-priced about 30 basis points lower in favor of the dollar. A drop below +50 bps could be meaningful — this level has long served as a bullish signal. Falling below it implies traders are no longer keen to hedge against a sharp euro rally.

Broader Narrative Still Intact

Capital outflows from the U.S., spurred by expectations of a weaker dollar policy under Trump, and the view that Europe is structurally undervalued, continue to support the euro long-term. ECB President Christine Lagarde reaffirmed this this week, saying the current environment is an opportunity to boost the euro’s global status — especially if European governments address longstanding structural growth issues.

Lagarde’s “Global Euro Moment” Gets Market Attention

If the EU moves toward stronger fiscal coordination and market integration, the case for a stronger euro could transcend Fed moves or U.S. domestic politics.

But Short-Term Technicals Warn of a Correction

Oscillators signal the need for a pullback, unless new highs are formed quickly. That healthy correction appears to be underway.

This Week Is About Defending Conviction, Not Chasing Highs

For euro bulls, the path forward is valid but increasingly conditional. Momentum has stalled, flows are mixed, and risk reversals are normalizing. Without a new catalyst, the rally will likely need to reset before resuming.