EUR/USD was little changed near 1.1590 in early Asian trade on Thursday, with attention on the US August ISM Services PMI report later in the session and Friday’s US Nonfarm Payrolls data. Fed Chair Kevin Warsh said policymakers may need to tighten again if inflation does not move convincingly towards 2%, while CME FedWatch put the September hike probability at 62.3%, up from below 40% before his speech. Geopolitics also stayed in focus after Donald Trump said strikes on Iran would likely be short-lived and reiterated US control of the Strait of Hormuz, while Mohsen Rezaei said Washington will soon see Tehran’s “new strategy” for war.
In Europe, ECB policymaker Gabriel Makhlouf said the central bank should not shy away from further rate rises if inflation “starts moving in the wrong direction”, and Joachim Nagel said markets see over a 95% chance of a September hike. Technically, the pair held above the 100-day SMA at 1.1565, with RSI at 51.80 and a pivot around the day’s open, though price remained capped below the Bollinger mid-line near 1.1605. Resistance was flagged at 1.1708, while support was also seen around 1.1500.
Defensive Dollar-Bullish Strategies Amid Geopolitical and Macro Tensions
We recommend that derivative traders adopt a defensive, dollar-bullish stance in the coming weeks as the EUR/USD pair hovers near 1.1590. With US safe-haven appeal rising due to escalating Middle East tensions, we expect the greenback to find strong support. Historically, periods of geopolitical friction in the Gulf, such as the major oil facility disruptions of 2019, have quickly driven capital away from the Eurozone and into US assets.
We must prepare for increased market volatility today as we await the US August ISM Services PMI, followed by the crucial Nonfarm Payrolls tomorrow. Given that the CME FedWatch tool now prices in a 62.3% chance of a September rate hike, stronger-than-expected US data will likely trigger a sharp EUR/USD breakdown. If the ISM Services index prints above the key 50 threshold, indicating expansion, we should target short-term EUR/USD put options to capture the downside.
Eurozone Outlook Capped by Energy Costs and Technical Levels
Despite hawkish rhetoric from ECB officials who see a 95% chance of a Eurozone rate hike, we believe the Euro’s upside remains heavily capped by soaring energy costs. Brent crude prices have recently rebounded toward $85 a barrel, which historically worsens the Eurozone’s terms of trade as a massive net energy importer. Past data shows that a sustained 10% increase in oil prices can widen the Eurozone’s trade deficit by billions, putting direct downward pressure on the single currency.
From a technical standpoint, we should closely watch the 100-day Simple Moving Average at 1.1565 as our primary line of defense for the Euro. A clean break below this level will likely open the doors for a rapid decline toward the lower Bollinger band at 1.1500. Conversely, we should use any temporary rallies toward the 1.1605 resistance level to establish new short EUR/USD positions.
