The euro edged down to near 1.1460 against the US dollar in Thursday’s European session, reversing earlier gains as the greenback stabilised. The move coincided with a firmer US Dollar Index, which was last slightly higher around 100.57, while markets weighed the inflationary implications of higher energy costs linked to Middle East tensions.
Crude prices were seen staying elevated on expectations of continued disruption to global supply as concerns persisted over a broader US-Iran conflict. Over the past two sessions, the dollar had come under pressure after traders pared back Federal Reserve rate-hike expectations following cooler US inflation data for June. Attention now turns to US Retail Sales for June, due at 12:30 GMT, with forecasts pointing to a 0.2% month-on-month rise after a 0.9% increase in May.
Trading Strategies Amid Volatility in the EUR/USD Pair
We recommend that derivative traders prepare for increased volatility in the EUR/USD pair, which is currently hovering around 1.1460. The resurgence of the US Dollar Index to 100.57, driven by escalating US-Iran tensions, suggests we should favor long dollar positions in the short term. With Brent crude oil prices climbing toward $85 a barrel due to these geopolitical risks, energy-backed inflation fears will likely keep the greenback supported.
To manage this risk, we should utilize out-of-the-money call options on the US Dollar and crude oil futures. Historical market data shows that during past Middle East conflicts, a 10% spike in oil prices has frequently triggered a swift 2% to 3% rally in the DXY. Buying protective puts on the Euro will also help us mitigate downside risk if energy-driven inflation forces the Federal Reserve to keep interest rates high.
Positioning Ahead of US Retail Sales Data
We must also prepare for the upcoming US Retail Sales data release, where a moderate monthly growth of 0.2% is expected. If the retail numbers beat this estimate, it will prove that the US consumer remains strong and could push the EUR/USD down toward the 1.1400 support level. In response, we should consider trading short-term straddles on the EUR/USD to capture the inevitable price swings right after the data is published.
