The headline and story above from Bloomberg News is indicative of the potentially rising geopolitical risk and negative sentiment occurring between the U.S. and the EU early in 2026. While many thought the talk of tariffs was behind the markets, because many had already been walked back or negotiated away, and because there were thoughts the Supreme Court may rule against tariffs, there may be a new round of tariffs on the way. Certainly, the U.S. moves in Venezuela and discussion of Greenland have been met with rebukes from many EU leaders, potentially raising the ire of the U.S. administration. While the story above discusses the impact on the stock market and credit indices, what could it mean for the EUR/USD currency cross?

The EUR/USD currency pair had a very strong 2025. It rallied over 15% from the lows in early January to the highs in September. Stepping back and looking at a five-year chart of the currency pair, we can see that there have been several areas of support that broke on the move lower in 2021 – 2022 that were areas of resistance on the way back up. In fact, the 1.200 level still held as an area of resistance at the end of the summer in 2025. Other levels that were breached may now be areas of support should the futures begin a move lower. These areas come in at 1.1500 and 1.1200, with the latter potentially bigger support because there proved to be strong resistance throughout 2023 and 2024. In fact, in early 2025, after it was breached, there was a throwback to the 1.150 level, and futures rallied sharply from there. These are levels to keep in mind for anyone trading futures on a weekly basis. 

With tensions maybe on the rise, it is worth taking a look at how each economy has been performing on a relative basis ahead of this. In fact, if we look at the ratio of the EU Purchasing Managers Index vs. the U.S. Purchasing Managers Index, we can see that it has done a pretty good job of leading futures prices by a month. The chart above shows that relationship. As you can see, even before the rumored tariffs, the EU economy began lagging the U.S. economy as measured by the PMI starting in Q4 of last year. If one were to assume that the EU economy has more potential risk to the downside, which is what the moves in the equity and credit markets were suggesting in their reactions to the news, this would suggest that there is downside potential in futures as they lag the economic performance by a month.

Another relationship that has worked well, and also leads by 1 month, is the ratio of the German ZEW business confidence index vs the U.S. Conference Board consumer confidence index. This relationship is even tighter than the PMI surveys. It is still holding up well suggesting there may be some that there is still reason to be optimistic about the relative performance of the EU economy and therefore the EC futures. However, as we saw in early 2025, futures did become disconnected from this ratio, which does bring in some doubt. It will be particularly interesting to see how this ratio moves when each index is updated at the end of January.

Another driver of currency movements in the past two years has been the fear of debasement. This has particularly been the case in the U.S. A way to create a proxy for this is to look at the growth of the M2 money supply, as it not only considers the actions of the central banks, but how these actions are making their way to the economy by virtue of the commercial banks. While the index looks at EU vs. U.S. money supply, I have inverted it to show when money growth is relatively faster, this is seen as more negative for the currency in the current environment. I then compare that inverted relationship vs. EC futures. We see that this relative performance leading by a month did a good job of pointing to downside in futures back in 2021 – 2022. When futures got extended from the relationship in 2024, they pulled back to the level at the end of the year. Once again, futures are extended from this relative index of money growth, which could lead to downside in the futures, perhaps not back to the 1.05 level where it has been when relative money growth was flat in the past as it is now. It might suggest a move back to the 1.10 level which is where futures spent the better part of 2023 – 2024.

Now it is time to turn to the CVOL tool to gather insight into how the options market is looking at events. On top, we get a glimpse of volatility in all currency pairs and in the G5 FX aggregate. From this, we see that volatility is at one-year lows across the board, not just in EUR/USD, but in all currency pairs. This may seem surprising to many who think the world appears to be unstable. However, relative to the shock to the system in early 2025, the year ended with arguably less turbulence than it started. This year may be starting out by bringing some volatility back. The middle chart looks at the EUR/USD CVOL compared to futures over the past 5 years, not just the past 1 year. From this view, we see that volatility levels are not only at the lows of the last year but at the lows seen over the last 5 years. This would seem to suggest there is more scope for a move higher than lower in volatility from current levels. Finally, the bottom chart shows the skew ratio, or the relative demand for downside put options vs. upside call options vs. futures. This shows that skew does a good job of anticipating higher and lower moves in futures. Namely, traders appear to demand upside either in anticipation of or coincident to moves higher in futures and appear to demand more downside options in anticipation of moves lower in futures. The skew ratio has recently headed lower, showing traders demanding more downside options, potentially signaling a risk to lower futures prices.

The demand for downside may be the result of extended positioning. The chart above shows the Commitment of Traders report for leveraged money in EUR/USD. This shows that leveraged money is still long EUR at a level that is down somewhat from fall of 2025, but still at a level that would be among the longest of the last 5 years in absolute terms. Are traders overly long EUR in anticipation of a U.S. dollar debasement trade and potentially at risk of a sudden slowdown in the EU economy, or at least an erosion in confidence in the EU?

Putting this all together, there may be scope for a downside move in EUR/USD if relative confidence falls and the EU economy begins to slow on a relative basis. The currency pair is stretched vs. the relative growth of money, and the technical chart suggests futures have failed at 1.20 resistance and are set to test 1.15 support. A breach of that level would suggest there is no support until 1.12 with a potential move to the 1.10 range the currency saw in 2023 – 24. Positioning is still extended on the long side even though it has been reduced in recent reports. The options market is anticipating a move lower by virtue of the move in skew ratios. However, volatility levels are still low, potentially giving traders an opportunity to position for any moves using long options, because the hurdle rate in volatility is low with volatility at the lowest levels for the past 5 years. Catalysts coming up are the FOMC meeting at the end of January and the ECB meeting at the beginning of February, where traders will hear how central bankers view the economy and the actions each is planning for the coming year.

Using this information, I have put together a ratio put spread where traders could sell 1 unit of a 1.1650 at-the-money put and use the proceeds to buy 3 units of the 1.1525 puts. While skew is higher for downside puts, the absolute level of volatility is low. The expiration chosen is Monday, February 9 for two reasons. First, the date captures both the FOMC meeting on January 28 as well as the ECB meeting on February 5. Monday options historically trade at a discount because little tends to happen over the weekend, so traders don’t want to pay theta for options that won’t pay out. However, as we saw throughout 2025 and are seeing again in early 2026, the U.S. administration seems equally likely to make pronouncements, change policy and/or put out posts over the weekend as it is during the week. Perhaps traders are discounting Monday options too much.

The chart shows the expected return. If futures stay at or above 1.1650, there is a tiny gain which comes from the small amount of premium taken in. The big risk to the strategy is a slower move down to, but not through, the 1.1525 strike. This is possible because the 1.150 level might be supported as we saw on the charts. The expectation here is that the risk and nervousness from renewed geopolitical angst will mean that futures, which enjoyed a strong 2025, could move through that level and push much lower. The breakeven on the downside is 1.1464, and profits go higher on a 2-to-1 basis because traders are net long 2 options from this ratio spread. A move back to 1.12 support would allow traders to make multiples of the money risked.

Of course, this is all how the payouts look on the February 9 expiration. Before that date, the spread makes money on any move to the downside so moves before the catalysts could bring about a possibility of traders trading out of the position because they are long vega and gamma. So, movement that leads to higher volatility would bring about the possibility of gains even before expiration.

This year is starting out to be one that could create a number of great trading opportunities. CME Group gives traders the tools they need to find the opportunities and the products they need to take advantage.

Good luck trading!

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