Euro’s Rally Faces Inflection Point as It Climbs Toward $1.20

The euro’s latest rally is approaching a pivotal level that could either stall its momentum or unlock the next leg toward $1.20, a target strategists and traders have circled for months.

After climbing as much as 1.6% in the past three days, the common currency is closing in on $1.17 — a zone that holds the heaviest notional volume in euro-bullish options so far this month, according to Depository Trust & Clearing Corporation data. That makes it a potential inflection point.

A break and hold above $1.17 could open the door for an accelerated push toward $1.20, a level last seen four years ago. If resistance holds, however, expect some profit-taking or flow-rebalancing first.

HSBC strategists increased their year-end forecast for the euro to $1.20 from $1.15 last week as they predict broad dollar weakness in the coming months. Danske Bank A/S analysts reiterated their 12-month euro of $1.20 last month while Deutsche Bank AG see a rally to that level by December.

The euro climbed as high as $1.1641 on Tuesday, its strongest intraday level since October 2021, as easing geopolitical tensions and softer US economic data fueled fresh demand for the common currency. The announcement of a ceasefire between Iran and Israel, along with cautious remarks from Federal Reserve Chair Jerome Powell, helped spark the latest push.

Money markets are pricing in a total of 59 basis points of Fed easing by year-end, compared with 25 basis points by the European Central Bank. The process of bringing inflation back to 2% is almost over, ECB Chief Economist Philip Lane said Tuesday, despite some remaining price pressures.

Options markets suggest investors retain conviction in a stronger euro. Risk reversals — which reflect the difference in pricing between bullish and bearish bets — jumped Tuesday by the fourth-largest margin in more than three years, signaling a decisive return of bullish sentiment. The shift followed a brief period in which the dollar found support from rising oil prices.

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The broader picture remains constructive. DTCC data shows more than 60% of notional euro options volume this month has favored calls. The euro was trading little changed near $1.1610 on Wednesday.