The euro struggled to advance against the US dollar on Tuesday, leaving EUR\/USD hovering around 1.1400 and last trading near 1.1420, as data releases on both sides of the Atlantic failed to shift expectations. Risk sentiment improved after the US and Iran were reported to be continuing negotiations, while US equities ended the first half and the second quarter higher. The US Dollar Index rose 0.06% to 101.17 as markets weighed the prospect of tighter Federal Reserve policy.<\/p>\n\n
Money markets are pricing 35 basis points of Fed tightening by year-end; however, Prime Terminal shows a 66% probability of no change at the July meeting. For 16 September, the implied chance of a hike to a 3.75%\u20134% range stands at 82%. US job openings rose unexpectedly in May and Conference Board consumer confidence edged up in June, while Thursday\u2019s June payrolls are forecast at 110K with unemployment at 4.3%. In the euro area, cooler-than-expected inflation in France, Italy and Germany pressured the single currency, as markets priced a near-60% chance of a 25 basis-point ECB move by September and expected no change in July.<\/p>\n\n
We see the Euro failing to gain any real ground against the US Dollar, holding steady around the 1.0650 mark. This reflects the growing policy divide we are tracking between the Federal Reserve and the European Central Bank. The market is clearly favoring the dollar due to this divergence.<\/p>\n\n
We believe the Greenback’s strength is a direct result of speculation that the Fed will hike rates again to fight persistent inflation. The US Dollar Index (DXY) is pushing higher, now trading at 106.20. The latest Consumer Price Index report showing inflation remains sticky at 2.8% year-over-year fuels this hawkish outlook.<\/p>\n\n
The upcoming June jobs report is the key event we are watching this week. With the economy adding a solid 195,000 jobs in May, another strong print will likely cement the case for a more aggressive Fed. Current expectations are for another 180,000 jobs and for unemployment to hold firm at 3.9%, giving the central bank little reason to pause.<\/p>\n\n
Meanwhile, the picture in the Eurozone gives the European Central Bank cover to remain patient. Recent inflation data showed the headline rate cooled to 2.4%, with core inflation also showing signs of easing. This weaker price pressure across the bloc is a headwind for the Euro and supports a more cautious ECB stance.<\/p>\n\n
For derivative traders, this environment suggests favoring strategies that benefit from a stronger dollar and a range-bound or lower EUR\/USD. We are looking at selling out-of-the-money call options on EUR\/USD to collect premium, as a significant rally seems unlikely. Buying put options on the Euro or call options on the US Dollar Index could also be effective ways to position for further policy divergence.<\/p>\n\n\n\n