S&P Global is due to publish the US July flash PMIs at 13:45 GMT on Friday, with markets pencilling in Services PMI at 51.0 versus 51.2 in June and Manufacturing PMI at 54.5 versus 53.9, both above the 50 breakeven. The releases also carry readings on employment and input inflation, which can feed through to the US Dollar (USD) and EUR/USD. Oil has become a key swing factor: West Texas Intermediate (WTI) is up nearly 30% in July as US-Iran tensions rise, and the CME FedWatch Tool shows markets pricing a nearly 80% probability of at least a 25 bps Federal Reserve (Fed) rate rise by September.
If the survey points to higher input costs and firms passing them on via prices, the USD could firm and weigh on EUR/USD; a slip below 50 in either headline PMI could have the opposite effect. Rabobank flags timing risk, arguing the poll was likely conducted over the past two weeks and may understate the latest Middle East escalation and this week’s oil move. In technical terms, EUR/USD is below the 20-day SMA, with RSI near 40; support sits at 1.1370-1.1350, then 1.1270 and 1.1160, while resistance is seen at 1.1420, then 1.1470 and 1.1570.
Derivative Market Strategies Amidst US Economic Strength
We suggest derivative traders prepare for heightened volatility in the foreign exchange and energy markets as the latest US S&P Global PMI data highlights resilient business activity. With manufacturing expected to bounce back to 54.5 and services holding above the expansion threshold at 51.0, the US economy is showing strong defensive characteristics. This economic strength is keeping the pressure on the Federal Reserve to maintain a hawkish stance heading into the autumn.
Given that EUR/USD is trading below its 20-day Simple Moving Average with a daily RSI hovering near a bearish 40, we recommend considering short-term put options on the pair. Historically, when EUR/USD breaks key support levels like 1.1350 under the weight of divergent central bank expectations, downside momentum tends to accelerate toward the 1.1270 mark. Traders can utilize bearish vertical spreads to capitalize on this potential slide while limiting upfront premium risk.
Hedging Against Oil Moves And Anticipating Rate Hikes
We must also account for the massive 30% surge in WTI crude oil prices this July, driven by escalating military tensions in the Middle East. Because early PMI survey responses likely missed the full scale of this oil price spike, the market may be severely underestimating upcoming input inflation. Buying out-of-the-money call options on crude futures or energy ETFs offers a smart way to hedge against a delayed spike in manufacturing costs.
Currently, the CME FedWatch Tool indicates a steep 80% probability of at least a 25 basis point interest rate hike by September. Historical rate hike cycles show that when inflation fears resurface alongside strong business activity, short-term Treasury yields rise rapidly. We advise derivative traders to position for higher yields by shorting Fed Funds futures or buying put options on liquid Treasury bond ETFs.
