The EUR/USD currency pair fell over 0.8% on Tuesday, reaching its lowest point in nearly three weeks. This occurred as the anticipation of a September rate cut from the Federal Reserve decreased following an increase in US CPI inflation in June.

US Consumer Price Index inflation continued rising towards the end of the second quarter. In June, the annualised headline inflation rate increased to 2.7% year-over-year, above the Federal Reserve’s 2% target, decreasing expectations for a near-term rate cut.

The Federal Reserve’s Rate Decisions

The CME’s FedWatch Tool indicates that markets now widely expect the Federal Reserve to keep rates unchanged at the July meeting. September rate cut expectations have lessened to a 44% chance, though there is an 80% likelihood of two rate cuts in 2025.

The Federal Reserve influences the US economy via interest rate adjustments, linked to inflation and employment goals. It employs various tools such as Quantitative Easing during financial crises to provide credit flow, which generally weakens the US Dollar, whereas Quantitative Tightening typically strengthens it.

The Federal Open Market Committee, part of the Federal Reserve, holds eight annual monetary policy meetings. These decisions impact interest rates, influencing the economic landscape and the value of the US Dollar.

Analyzing Currency Movement Strategies

The game has changed, and we must adapt swiftly. The drop in the currency pair is not a blip; it’s the start of a fundamental repricing. The core reality is that US inflation remains persistently sticky. While the latest June report showed a headline number of 3.1%, down slightly from May’s 3.3%, it’s still a world away from the Committee’s target. Couple this with a labor market that continues to defy gravity, adding 209,000 jobs in the most recent report, and the case for near-term easing evaporates. Powell has all the ammunition he needs to justify holding rates higher for significantly longer.

Our strategy, therefore, must pivot to capitalize on policy divergence. While the Fed stands firm, the European Central Bank has already blinked, cutting its key rate in June. Lagarde faces a softer economic picture, giving her more latitude to ease further. This creates a powerful, fundamental tailwind for the dollar against the euro. We see the path of least resistance for EUR/USD as decisively lower.

For us, this means it’s time to actively build short-side exposure. Rather than simply shorting the spot market, we should be looking at the options market to define our risk. We favour buying puts or establishing bear put spreads on EUR/USD, targeting levels below 1.0600 in the coming weeks. This allows us to profit from a continued grind lower while capping our maximum loss. Selling out-of-the-money call spreads is another attractive strategy for generating income, betting that any rallies will be shallow and quickly sold into.

Historically, the dollar remains king until the Federal Reserve not only signals a pivot but actually begins the cutting cycle. We are not there yet. The market’s repricing confirms this; a quick check of the FedWatch tool this morning shows the odds of a September cut have collapsed to below 40%, with conviction only building for a single cut by December, if that. The risk to this view is a sudden, sharp deterioration in US economic data, specifically a shock in employment or retail sales figures. We will watch those releases like hawks, but for now, the trade is to position for a stronger dollar. The era of quantitative tightening and its supportive effect on the greenback is not over.

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