EUR/USD Technical and Fundamental Drivers
EUR/USD rose further on Thursday as the US Dollar stayed under pressure after the Federal Reserve left rates unchanged at 3.50%–3.75% on Wednesday, while suspected Japanese action to curb Yen weakness added to broader Dollar selling. The pair was near 1.1534, its highest since 17 June, as the US Dollar Index (DXY) hovered around 100 and was down 0.80% on the day. US data showed annualised GDP growth of 1.5% in Q2, below the 2.1% forecast and the 2.1% pace in Q1, while June’s Core PCE Price Index rose 0.1% month on month versus a 0.2% estimate and 0.3% previously. On a yearly basis, core inflation eased to 3.3% from 3.4%, in line with expectations.
Personal income increased 0.2% in June after 0.7% in May, and personal spending rose 0.3% following a 0.9% gain. Inflation remains above the Fed’s 2% target, even as markets continue to price tighter policy later in the year, with the CME FedWatch Tool indicating a 55% probability of a 25-basis-point move in September. The euro also drew support from Eurozone GDP, where preliminary Q2 growth was 0.4% quarter on quarter, beating a 0.2% forecast and reversing a 0.2% contraction in the prior quarter. ECB projections cited in the report put 2026 real GDP growth at 0.8%.
Trade Strategies for EUR/USD Momentum
We suggest derivative traders position themselves for continued upward momentum in the EUR/USD pair in the coming weeks. With the exchange rate breaking highs near 1.1534 and the US Dollar Index slipping to the critical 100 support level, the technical bias has shifted heavily in favor of the Euro. This weakness in the Greenback is further compounded by recent suspected interventions from Japanese authorities to strengthen the Yen.
Given the sluggish US second-quarter GDP growth of just 1.5% and cooling core inflation at 3.3%, the Fed is facing immense pressure. We recommend buying EUR/USD call options with late September expirations to capitalize on this dollar weakness while limiting downside risk. Historically, when the US Dollar Index drops below the 100 mark, as it did during similar economic slowdown concerns in July 2023, it tends to trigger rapid momentum selling.
Volatility Considerations and Positioning Recommendations
On the other side of the Atlantic, the Eurozone’s surprising 0.4% growth in the second quarter has reignited expectations that the ECB will hike rates in September. Traders should monitor option implied volatility, which is currently rising as both the Fed and the ECB head toward highly anticipated autumn meetings. We favor using bull call spreads to reduce the cost of premium while targeting a potential move toward the 1.1650 level by late August.
The CME FedWatch Tool currently prices in a 55% probability of a US rate hike in September, indicating that the market remains highly divided. To exploit this divergence, we suggest taking long positions in Eurocurrency futures to capture shifts in interest rate expectations. Keeping an eye on oil price fluctuations and geopolitical tensions will also be vital, as any sudden spike in energy costs could quickly disrupt these trend lines.
