The euro has increased by 125 pips to 1.1517. This rise is attributed to the euro becoming a preferred currency amid U.S. trade uncertainties, supported by the options market’s strong upside signals. The EUR/USD risk reversal curve shows the most optimistic outlook in five years, anticipating further euro appreciation.

The weakening confidence in the USD, due to U.S. trade unpredictability, contrasts with Europe’s relative security from a tariff pause and Germany’s fiscal developments. The euro serves as a defensive asset, drawing attention from those seeking stability and diversifying away from USD risks.

The three-month EUR/USD risk reversal has reached a five-year high, suggesting strong interest in near-term euro gains. Short-dated EUR calls are now pricier than longer-dated ones, reflecting traders’ urgency for short-term upside exposure. With ANZ’s prediction for ECB cuts in 2025 fully priced in, interest rate changes are unlikely to lower the euro soon.

A brief decline to 1.12 might occur if U.S.-Europe trade relations improve, but the euro’s upward trend remains strong. Unless there are major changes in trade risks, the euro is expected to continue its positive trajectory, demonstrating resilience and potential for further gains.

The article outlines a meaningful shift in sentiment around the euro, whose recent rise owes much to demand for safety amid murky U.S. trade policies. With the euro climbing by 125 pips to register at 1.1517, we’re seeing traders responding to instability elsewhere by leaning into European assets. Specifically, the options market has reinforced this direction. Risk reversals on EUR/USD—those being the pricing differences between calls and puts—are flashing the strongest upside preference we’ve seen in half a decade. That is, the cost of betting on more euro strength now vastly outweighs the cost of hedging against a drop.

This is not just about forex spot levels—there’s an options-driven urgency pointing to near-term appreciation. Short-term euro calls, particularly those with a three-month expiry or less, are increasingly expensive compared to longer maturities. That steepness suggests that the market expects a sharper or faster move upwards rather than a gradual rise over time. And because rate expectations for 2025 already account for projected ECB cuts, it would take a surprise shift—probably from outside Europe—to dampen this momentum.

Trade relations between large economies still sit at the core of this repricing. While American policy continues to whip sentiment back and forth, European markets have benefited from a momentary pause in tariff threats. On top of that, Germany appears willing to loosen the fiscal reins, which has raised investor interest across the eurozone. Together, these moves have painted the euro less as a growth bet and more as a defensive shield.

Now, for those of us focusing on derivatives, particularly euro options, the current message from risk reversals is not one to ignore. The market is moving into shorter maturities with a view to capture quick upside. That means premiums are rising in tandem. Unless you believe U.S.-Europe trade talks will suddenly and measurably improve—something not currently supported by any hard evidence—a short dip towards 1.12 wouldn’t undo this trajectory. Such a pullback, if it happened, would likely be transient and more of a positioning cleanout than a reversal of belief.

We shouldn’t treat this shift lightly. Elevated short-dated calls and historically skewed risk reversals don’t form without notable conviction behind them. Traders building positions should factor in the added cost of such skew, and use it either by capturing theta in mid-curve expiries or by structuring high-delta spreads to manage any incurring premium risk. Self-discipline matters now more than ever, particularly if you’re exposed to near-term volatility spikes.

Any players holding longer-dated downside strategies may now find themselves rolling or compressing those past expiries into shorter views to reflect the revisions in probability. Clearly, a wait-and-see stance will come at a cost. Even the implied volatility curve has lifted on the front end, implying the market sees movement—not calm.

As price action keeps climbing, we’ll be watching to see if skew pressure bleeds into backdated maturities. It hasn’t yet—but the moment that curve starts flattening, an opportunity could emerge for relative-value setups between front-month and quarterly structures. Until then, positioning continues favouring asymmetry to the upside.