Euro Outlook: EUR/USD squeeze risk grows on TACO trade

• De-escalation signal sparks classic TACO trade reversal
• EUR/USD prints bullish hammer candles at major support
• 200DMA looms as key upside test if sentiment holds

Energy narrative may be turning for Europe

Markets may have just delivered the latest example of the now familiar “TACO” trade.

Late in the US session Monday, President Donald Trump suggested the war against Iran was already nearing completion, claiming Washington was well ahead of the four-to-five week timeline initially outlined. The comments came despite the conflict still ongoing and the Strait of Hormuz effectively shut, but that didn’t stop markets reacting in predictable fashion.

Investors have increasingly come to expect eventual de-escalation after periods of heightened rhetoric, producing a Pavlovian response whenever signs of a potential climbdown emerge. Those episodes have often generated violent reversals, with markets overshooting in both directions within the space of days. That pattern may again be unfolding.

Reports the administration is also considering easing sanctions on Russian oil add another interesting layer. Any move that allows more Russian supply back into global markets would help offset the disruption stemming from the Middle East conflict. For Europe in particular, the implications are notable given its heavy reliance on imported energy and the additional logistical challenges created by shipping disruptions through the Red Sea and Mediterranean.

That prospect provides a potential catalyst for a reversal in the euro, both against the US dollar and on the crosses, following a pronounced stretch of underperformance since the conflict began.

What’s also notable is that despite the constant focus on Europe’s energy vulnerability, the relationship between energy prices and moves in the common currency has flipped negative over the past week. That suggests the energy shock was priced rapidly early on, with more recent price action being driven by other forces.

Against that backdrop, a cluster of bullish reversal signals emerging on the daily chart from a noted support zone leaves the near-term risk tilted towards a squeeze higher should sentiment not unravel again.

Hammer candles hint at EUR/USD rebound

Source: TradingView

What’s caught my eye are the back-to-back bullish hammer candles seen on Friday and Monday, with long downside wicks forming beneath the confluence of uptrend support dating back to August 2025, January’s low of 1.1579 and 1.1550, a level that acted as both support and resistance in November last year.

Despite the panic across riskier asset classes in Asia and Europe in recent days, bearish probes into that support zone were repeatedly absorbed. That’s telling.

While RSI (14) remains sub-50, it is now grinding higher off the lows, signalling downside pressure is starting to ease. MACD is yet to confirm the shift, but there are early glimpses it may be starting to turn back towards the signal line. Momentum is no longer building on the downside, even if bears remain in the ascendency for now.

The key question now is whether the optimism sparked in the US session can extend into Asia and Europe once physical trade gets underway. I suspect it may, increasing the risk EUR/USD could squeeze back towards the 200DMA.

That looms as the key level overhead, with 1.1683 another level of note just above given it acted as both support and resistance either side of the calendar year turn. A clean break above the latter would allow longs to be set with a stop beneath either level for protection, targeting the 50DMA and/or resistance at 1.1768.

For those looking to act on the bullish price signals already in place, longs could also be set on potential pullbacks towards 1.1579, allowing for a tight stop to be placed beneath for protection while targeting the 200DMA initially.

With little on the economic calendar today to trouble the scorers, headlines, sentiment and price action appear likely to set the tone.