EUR/USD ended July marginally higher near 1.1500 after rising more than 1.1% in the final week and touching 1.1530 before the close. Early-week US dollar demand followed escalation in the US-Iran conflict and renewed disruption around the Strait of Hormuz, which has closed again, before sentiment steadied on a pause in strikes and talk of talks. Attention then shifted to the Federal Reserve, which kept its benchmark rate unchanged for a fifth meeting at 3.50%-3.75% despite dissent from three regional presidents who favoured a 25 bps rise. In rates pricing, the CME FedWatch Tool showed September hike odds at 65%, up from 55% a week before the FOMC decision.
US macro data also fed into the mix. Preliminary Q2 GDP growth slowed to 1.5% annualised from 2.1% in Q1, while the GDP Price Index accelerated to 6.3% from 3.6%; core PCE inflation was 3.3% in Q2 and June, easing from 3.4% in May but still above the 2% goal. In Europe, Q2 annualised GDP growth improved to 0.9% in Germany from 0.4%, and to 1% in the Eurozone from 0.3%, while July HICP inflation printed at 2.8% in Germany versus 2.4% and 2.5% in the Eurozone versus 2.4%. Markets assign about a 65% chance of an ECB 25 bps hike in September, and the week ahead brings ISM PMIs, final S&P Global PMIs, and US labour releases including NFP, expected at 91K versus 57K, with unemployment seen at 4.3% versus 4.2%.
Derivative Strategy: Positioning for Euro and Pound Outperformance
We advise derivative traders to position for front-end Euro and British Pound outperformance against the US Dollar in the coming weeks. With the Federal Reserve holding interest rates steady at 3.50%-3.75% despite high inflation, US swap spreads have tightened and the yield curve has steepened. This monetary hesitation makes long EUR/USD call options or bull risk reversals highly attractive, especially as we target the key technical resistance level near 1.1568.
Historically, whenever the growth momentum shifts in favor of Europe—with Eurozone GDP rising to 1% while US growth slows to 1.5%—the Euro gains substantial upward traction. This divergence mirrors historical patterns from similar growth-gap narrowings in the past, which have historically pushed the EUR/USD up by several percentage points in a matter of weeks. We believe utilizing short-term interest rate futures to bet on a hawkish European Central Bank compared to a hesitant Fed offers a highly favorable risk-reward setup.
Risk Management: Navigating Volatility and Geopolitical Risk
Traders should also prepare for heightened volatility in early August, particularly around the US Nonfarm Payrolls release where unemployment is expected to rise to 4.3%. To capitalize on this, we recommend buying short-dated straddles or strangle options on EUR/USD to capture sharp moves driven by the upcoming employment and ISM data. If the US jobs data underperforms the expected 91,000 addition, a quick breakout past the 200-day moving average at 1.1631 is highly likely.
At the same time, we must remain cautious of sudden geopolitical spikes from the Strait of Hormuz that could instantly trigger safe-haven USD buying. Implementing knock-out barrier options or collar strategies can help protect our bullish Euro positions from these sudden risk-off shocks. This balanced derivative approach allows us to capitalize on the weak US monetary policy outlook while keeping a tight lid on geopolitical downside risks.
