Insights 
VT 
EUR/USD experienced a strong rise from 1.1391 to 1.1554, a gain of over 1%, triggered by US jobs data. The July Nonfarm Payrolls reported only 73,000 new jobs, far below expectations, leading to a forecast of two Federal Reserve interest rate cuts by December.
Wall Street faced losses tied to concerns of a US economic slowdown. Manufacturing activity in the US contracted, and consumer sentiment declined slightly, adding to the bleak economic outlook.
Trading Expectations
Traders expect a 62 bps decrease in the federal funds rate by the year’s end, with a 76% chance of a 25 bps rate cut in September. In contrast, EU inflation data outperformed expectations with a HICP of 2.4% YoY.
The ISM Manufacturing PMI fell to 48.0, marking ongoing contraction. While consumer sentiment rose, inflation expectations were revised, showing varied confidence in price stability.
The EUR/USD is poised for an uptrend with resistance anticipated at 1.1600. A rise above the 20-day SMA could push it to 1.1700, whereas a decline below the 50-day SMA may lead to 1.1500.
The recent US jobs report was a significant miss, with only 73,000 jobs added in July. This has fundamentally shifted our view towards a weaker US dollar in the near term. We are now pricing in aggressive Federal Reserve action to support a slowing economy.
Policy Divergence and Strategy
The Fed is expected to cut rates twice before the end of the year, a stark contrast to the European Central Bank. Europe’s inflation is holding firm, with the latest HICP data at 2.4%, giving the ECB little reason to match the Fed’s dovish turn. This growing policy divergence is the primary driver for our strategy in the coming weeks.
We’ve seen this situation before, looking back to the Fed’s policy pivot in 2019. Back then, similar concerns over slowing growth forced the Fed to cut rates three times, which created sustained pressure on the dollar. The current manufacturing contraction, with the ISM PMI at 48.0, reinforces this parallel.
Given the uncertainty, we are seeing a rise in implied volatility, which makes options more expensive but also more valuable. We should consider buying EUR/USD call options to capture the potential upside toward the 1.1700 level. This strategy effectively limits our downside risk if the market suddenly reverses.
For a more cost-effective approach, we can use bull call spreads on the EUR/USD. By buying a call option just above the current price and selling another at the 1.1700 resistance target, we can lower our initial cost. This specifically targets the rally we anticipate while defining our risk and reward.
Our focus now shifts to the next US inflation and consumer sentiment reports. According to the CME’s FedWatch Tool, markets are pricing in a 76% chance of a September rate cut. Any data that confirms US economic weakness will likely accelerate the dollar’s decline and strengthen our position.
