EUR/USD was firmer on Friday, trading near 1.1400 after touching 1.1434 earlier in the US session, yet it remained set for a second consecutive weekly fall as tensions around the Strait of Hormuz and a restrictive Federal Reserve outlook helped cap US Dollar weakness. The dollar steadied after Thursday’s US Personal Consumption Expenditures report indicated underlying inflation was relatively contained, tempering expectations of a near-term Fed rate rise, even as inflation remains above the central bank’s 2% target.
The US Dollar Index (DXY) traded around 101.26, having reached about 101.80 earlier in the week. Negotiations between the US and Iran had not produced a final agreement after a 60-day Memorandum of Understanding earlier this month, while Iran reiterated that safe passage requires coordination with its authorities and pursued transit toll plans. In Europe, markets recalibrated expectations for another European Central Bank move as energy prices eased, though Commerzbank projected an additional rate hike in September and forecast inflation staying around 3% through year-end.
EUR/USD Struggles Amid Strong Dollar and Geopolitical Tensions
We see the EUR/USD pair struggling to hold its ground, currently trading near 1.0850. While the pair has seen small daily gains, the broader trend is weighed down by a resilient US Dollar. The fragile situation in the Middle East, with renewed tensions around key shipping lanes, continues to bolster the dollar’s safe-haven appeal.
Our view is that the Federal Reserve will remain cautious, which should keep the dollar strong. Recent data from the Bureau of Labor Statistics shows core services inflation remains stubbornly high, running at an annualized rate of 3.5% and keeping overall inflation well above the 2% target. This makes us believe the market is pricing in too many rate cuts for the remainder of the year.
ECB Policy Easing and Strategic Considerations for EUR/USD
On the other side of the Atlantic, we expect the European Central Bank to continue its easing cycle. The latest manufacturing PMI data for the Eurozone came in at a disappointing 48.2, signaling economic contraction and giving the ECB more reason to cut rates further. This policy divergence with the Fed is a key factor weighing on the EUR/USD.
Given this outlook, we are considering strategies that benefit from a declining EUR/USD or at least limited upside. Buying put options on the Euro could be an effective way to position for a drop towards the 1.0600 level in the coming weeks. The heightened geopolitical risk has also increased implied volatility, making options a useful tool to define risk in this uncertain market.
