EUR/USD eased back below 1.1700 after briefly touching a three-month high, as a firmer US Dollar kept the pair from closing Thursday above that level. The move tracked a rebound in US Treasury yields after the Treasury said it would increase buybacks of long-dated bonds to $4 billion from $2 billion. The US Dollar Index (DXY) was up 0.10% at 98.84, limiting any push that might have brought 1.1800 into view, a level last seen on 17 April.
US labour data also supported the Dollar: weekly jobless claims for the period ending 15 August came in at 206K, below the 210K forecast and the prior 212K reading, even after a weak July NFP report. Fed minutes for July showed deeper concern on inflation, with several policymakers ready to raise rates and many pointing to a hike if inflation fails to move towards 2%; swaps price a 35% chance of a September increase and about 64% by December, according to Prime Terminal. In the Eurozone, Germany’s July PPI rose to 1.1% MoM from -0.3%, while the annual rate increased to 3% from 1.8% versus a 2.7% forecast, with flash PMIs next for France, Germany, the Eurozone and the US.
Derivative Strategies for EUR/USD Pullback
We suggest derivative traders look at short-term options strategies to capture a potential pullback, as the EUR/USD pair struggles to hold the 1.1700 level. With the 14-day Relative Strength Index (RSI) hovering in overbought territory at 73.13, the immediate upside looks limited. We should consider buying short-dated put options or setting up bear put spreads to profit from a corrective drop back toward the solid support cluster around 1.1472.
Our view is reinforced by the recent rebound in US Treasury yields, which has breathed new life into the Dollar Index. The US Treasury’s decision to double its long-dated bond buybacks to $4 billion has tightened liquidity and pushed the DXY up to 98.84. Historically, when the US Dollar Index stabilizes above the 98.50 mark, Euro rallies tend to fizzle out quickly, making aggressive long positions highly risky right now.
Navigating Flash PMI Releases With Volatility-Based Trades
To navigate the upcoming Flash PMI releases, we recommend using volatility-based derivative strategies like long straddles. The swaps market currently prices in only a 35% chance of a rate hike in September, meaning any positive US economic surprise could rapidly shift these odds and spark sharp market moves. Given that the December hike odds stand at a much higher 64%, any strong economic data will likely trigger a rapid unwinding of Euro longs.
If the EUR/USD manages to hold above the critical support of 1.1681 after the PMI data, we can transition to writing out-of-the-money puts near 1.1450 to collect premium. This level is heavily protected by a cluster of simple moving averages, which historically act as a strong floor during corrective phases. For now, we remain cautious on chasing breakouts above 1.1700 until we see a daily close above the major horizontal resistance at 1.1849.
