EUR/USD edged down on Monday, trading at 1.1385 after failing near 1.1430. The pair is hovering close to yearly lows and is on course to end June down nearly 2.30%, its weakest monthly showing since July last year. German data did little to shift the tone: retail sales rose 1.1% in May after a downwardly revised 0.4% fall in April, beating forecasts for a 0.1% decline. On a 12-month basis to May, consumption increased 1.8% after a 0.6% drop in April, Destatis said.
The US Dollar remained supported by pricing that the Federal Reserve could raise rates as soon as September, while the US Supreme Court blocked US President Donald Trump’s effort to dismiss Fed Governor Lisa Cook, reducing concerns about central bank independence. With FX volatility subdued, attention turns to US jobs data, starting with Tuesday’s JOLTS Job Openings release and culminating in Thursday’s Nonfarm Payrolls report; June payrolls are forecast to rise by 110K after 172K in May. Separately, reports said US and Iranian negotiators are in Doha to resume peace talks, and Oil prices holding around pre-war levels has offered some support to the Euro.
Euro Vulnerability Amid Central Bank Policies
We see the Euro trading weakly against the US Dollar around 1.0550, continuing its downward trend for the month. This weakness persists despite some stable economic data out of Germany, suggesting the market is focused elsewhere. The key driver remains the wide interest rate differential between a hawkish Federal Reserve and a more cautious European Central Bank.
The dollar continues to draw strength from expectations that the Fed will hold rates higher for longer to combat sticky inflation, which is currently at 3.2%. We are looking to this week’s Nonfarm Payrolls report for direction, with forecasts centering around a 150,000 job gain for June. A number significantly above this could cement expectations for another rate hike, further boosting the dollar.
Market Opportunities and Geopolitical Risks
With implied volatility in foreign exchange markets being unusually low, we believe this is a good time to consider buying derivative protection or making directional bets. Given the upcoming payrolls data, we see value in purchasing short-dated EUR/USD put options. This strategy provides a defined-risk way to profit if a strong jobs report pushes the pair through its recent lows.
We are also monitoring the ongoing geopolitical tensions in Eastern Europe, which continue to create uncertainty around energy prices for the continent. Any spike in oil or natural gas would disproportionately harm the Eurozone economy, reinforcing the negative outlook for the Euro. Historically, periods of energy price volatility have often coincided with underperformance of the EUR against the USD.
