Short-Term Drivers and Market Positioning
We are viewing Friday’s rebound in EUR/USD as a short-term correction driven by easing geopolitical tensions in the Middle East. This has provided a brief respite for the Euro, but the underlying fundamentals have not changed. Derivative traders should be cautious about this strength, as it may present a better level to re-establish bearish positions.Monetary Policy Divergence and Tactical Outlook
The Federal Reserve remains more hawkish than the European Central Bank, which is the primary driver for our outlook. With the latest US core PCE data for May 2026 coming in at 3.1%, the Fed has clear justification to keep rates higher for longer. This persistent interest rate differential in favor of the dollar will likely cap any significant EUR/USD rallies. We see continued weakness in the Eurozone economy, which limits the Euro’s potential even with a hawkish ECB. Recent data showed the flash Eurozone Manufacturing PMI for May 2026 was 48.5, remaining in contractionary territory for the fourth consecutive month. This economic divergence with the US, whose Services PMI was a robust 53.2, reinforces the case for a stronger dollar. In the coming weeks, we will look to use options to express this view, potentially by selling out-of-the-money call spreads to capitalize on a capped upside. Next week’s preliminary PMI releases and the US PCE data will likely increase volatility, offering tactical opportunities. We believe strategies that profit from range-bound trading or a gradual decline toward the 1.1400 level remain prudent.Start trading now — click here to create your real VT Markets account.
