The euro was subdued near $1.1535 against the US dollar in Wednesday\u2019s European session, with EUR\/USD trading cautiously before the Federal Reserve decision due at 18:00 GMT. The CME FedWatch tool puts the probability of a 25 basis point rate rise to 3.75%\u20134.00% at 92.5%, and separately indicates an almost 79% chance of at least two hikes by year-end. Attention is also on the Fed\u2019s dot plot, as well as the policy statement and Chair Kevin Warsh\u2019s remarks on inflation and the economic outlook.<\/p>\n
In the euro area, European Central Bank officials have flagged the risk that inflationary pressures remain elevated, potentially implying further tightening. The ECB last week lifted policy rates by 25 bps, in line with expectations. On the charts, EUR\/USD was around 1.1532 and retained a bearish near-term tone below the 20-period EMA at 1.1589, while the 14-day RSI hovered near 40. Resistance is seen at 1.1589 and support at the 1.1500 level.<\/p>\n
We suggest that derivative traders prepare for a surge in market activity by targeting short-term EUR\/USD put options. With the pair trading weakly at 1.1535 and hovering just above the critical 1.1500 support, buying put options with a strike price of 1.1450 offers an attractive risk-reward ratio. Historically, during the initial phases of monetary tightening cycles, the US Dollar has strengthened by an average of 2% to 4% against major currencies in the weeks following the first rate hike.<\/p>\n
Because the market has already priced in a 92.5% chance of a rate hike today, the actual announcement might trigger a brief “sell the news” volatility spike before the primary downward trend resumes. To guard against this, we recommend employing bear put spreads rather than outright puts, which helps lower the cost of premium. Market data shows that EUR\/USD implied volatility typically contracts by 10% to 15% immediately after the Fed press conference, which can quickly erode the value of unhedged long options.<\/p>\n
We must also account for the hawkish sentiment from the European Central Bank, which recently raised its rates by 25 basis points to combat sticky Eurozone inflation. If the Fed’s economic projections reveal a softer-than-expected outlook for the rest of the year, EUR\/USD could quickly squeeze back toward the 20-period exponential moving average at 1.1589. For traders looking to hedge against this potential upside reversal, executing a call calendar spread allows us to benefit from time decay while keeping our overall risk tightly defined.<\/p>\n\n\n\n