EUR\/USD held firm despite a jump in oil prices, as yield spreads moved in the euro\u2019s favour. Euro swap rates rose around 7\u20138bp more than short-dated US rates, reflecting expectations that the ECB could deliver another hike at its September meeting. Money markets currently price that move at +22bp. The ECB minutes from the 11 June meeting, alongside higher energy prices, are set to shape near-term rate expectations.<\/p>\n
Attention, however, remains heavily tilted towards the Fed narrative, which is likely to set the tone for the session. Against that backdrop, the pair\u2019s early gains look vulnerable, with scope for the euro to slip back below 1.14. Separately, President Trump again raised Greenland at the NATO conference, a reference linked to January\u2019s backlash in US asset markets from European investors, though the connection to EUR\/USD price action is unclear.<\/p>\n
We see that EUR\/USD has held up well, currently trading around 1.1425, despite rising energy costs. This is because Eurozone interest rate swaps have outperformed their US counterparts, pricing in a 22 basis point ECB rate hike for September. We feel this resilience is unlikely to last through the coming weeks.<\/p>\n
However, we believe the Federal Reserve’s policy path will be the more powerful driver. Last week’s US Non-Farm Payrolls report showed a robust addition of 255,000 jobs for June, and the latest Core PCE inflation figure came in at 2.9%, slightly above consensus. This strengthens the case for the Fed to remain restrictive for longer, overpowering the ECB narrative.<\/p>\n
Given this outlook, we see an opportunity in positioning for a weaker euro against the dollar. Purchasing EUR\/USD put options with strike prices around 1.1350 or 1.1300 for late July or August expiries could be a prudent strategy to capitalize on a drop below the 1.1400 level.<\/p>\n
The recent spike in WTI crude oil to over $85 a barrel and the expectedly hawkish tone from the June 11th ECB minutes will likely keep those September hike odds firm. Historically, however, sustained US economic outperformance tends to strengthen the dollar significantly more than a single anticipated ECB hike can support the euro. We view any euro strength on the back of the ECB minutes as a temporary opportunity to enter bearish positions.<\/p>\n\n\n\n