EUR/USD edged higher on Thursday as softer oil prices helped nudge US Treasury yields down from recent peaks, prompting the US Dollar to pare some post-Fed gains. The pair was trading around 1.1492, up 0.24% on the day, near levels last seen on 31 July. WTI hovered near $95.50, down nearly 2%, after Saudi Arabia’s rerouting efforts and expectations of a quicker pipeline recovery following last week’s drone attacks eased supply concerns; separately, Reuters said China had privately asked Iran to help stop Houthi attacks after an appeal from Saudi Arabia. The 10-year US Treasury yield slipped to about 4.94%, below the 5.04% touched earlier in the week, its highest since 2007.
The greenback had rallied on Wednesday to a seven-week high after the Federal Reserve raised its benchmark rate by 25 basis points to 3.75%–4.00%, its first increase since 2023, while projections showed 16 of 18 policymakers anticipate at least one more quarter-point move by year-end. The CME FedWatch Tool points to roughly a 50% probability of another hike in October, and weekly data showed Initial Jobless Claims at 196K versus 206K, undershooting expectations of 208K. DXY was near 100.08 after an intraday peak of 100.37, while euro area data showed final August HICP at 3.2% and core inflation at 2.4%.
Derivatives Outlook Amid Dollar Strength and Rate Uncertainty
With US 10-year Treasury yields hovering near 4.94% and the Federal Reserve hinting at another rate hike by year-end, we advise derivative traders to brace for prolonged dollar strength. Historical data from similar high-yield regimes, such as in October 2023 when the 10-year yield breached 5.0%, shows that the US Dollar Index (DXY) tends to sustain its upward momentum. Consequently, we should look to establish long dollar positions using short-term FX options to capitalize on this hawkish momentum.
The EUR/USD is currently facing heavy resistance near the 1.1500 level, capped by the Fed’s recent 25-basis-point rate hike to the 3.75%-4.00% range. To trade this currency pair over the coming weeks, we recommend buying out-of-the-money EUR/USD put options with an October expiration. This strategy allows us to hedge against a sudden drop toward 1.1300 if the CME FedWatch Tool’s current 50% probability of an October rate hike shifts higher.
In the interest rate derivatives market, the gap between the Fed’s hawkish dot plot and market pricing presents a clear opportunity. Since 16 of 18 Fed policymakers expect another rate increase, we believe shorting Federal Funds rate futures or Secured Overnight Financing Rate (SOFR) futures is a highly viable play. This positioning aligns with the tight US labor market, highlighted by the recent drop in weekly jobless claims to 196,000, which will likely keep upward pressure on yields.
Energy Markets: Oil Volatility and Trading Strategies
We must also closely watch West Texas Intermediate (WTI) crude options, as the current price of $95.50 remains highly sensitive to Middle Eastern supply dynamics. Implied volatility in oil markets historically spikes by over 15% during periods of geopolitical tension in the Persian Gulf, making oil straddles a smart choice for trading the range. By purchasing both call and put options, we can profit from large price swings regardless of whether Saudi supply recovery succeeds or Houthi tensions flare up again.
