The US dollar is experiencing a decline in European morning trade, influenced by recent comments from Fed governor Waller. Waller suggested a 25 basis point interest rate cut at the July FOMC meeting, amid uncertainties surrounding the long-term Fed Fund rate, which some estimate at 3%.
These remarks come before the FOMC blackout period, starting tomorrow, with an exception for Fed chair Powell’s scheduled speech next week. In response to Waller’s comments, the dollar is under pressure, notably affecting the EUR/USD pair as it tests key near-term levels.
Risks For Eur Usd Pair
The pair has maintained its position at the 100-hour moving average but may now be at risk of dropping below it. The current critical level is at 1.1632, and failure to maintain this could shift the outlook to a more neutral stance.
Large options expiries for the pair at 1.1650 could contain any session upside. Otherwise, price movement may progress towards the 200-hour moving average, now at 1.1670. Recent technical signals indicate a decrease in dollar momentum from recent weeks, posing potential considerations as the week concludes.
Based on the dovish pivot from Waller, we believe traders should position for a weaker dollar in the near term. The CME FedWatch Tool now indicates an over 85% probability of a rate cut this month, giving strong statistical backing to this sentiment. These odds suggest that derivative strategies that profit from a falling dollar are now more viable.
Opportunities In Buying Call Options
For traders focused on the EUR/USD pair, we see value in purchasing call options with strike prices above the key 1.1650 level mentioned. A sustained break through that area, pushing towards the 200-hour moving average at 1.1670, would signal that the dollar’s recent strength has truly reversed. This is a direct play on the waning momentum highlighted by the technicals.
This outlook isn’t based on rhetoric alone; it aligns with recent fundamental data. The latest Consumer Price Index report showed core inflation cooling more than expected, which reduces the urgency for the Federal Reserve to maintain a restrictive policy. This economic reality adds a layer of credibility to a bearish dollar stance leading into the central bank’s meeting.
Historically, the U.S. dollar often depreciates in the period just before and after the first rate cut of an easing cycle. We are likely entering that exact window, suggesting this trend of dollar weakness could have legs beyond just a few weeks. This pattern supports building derivative positions that could profit through the late summer.
We must remain vigilant ahead of Powell’s remarks next week, as they fall outside the typical blackout period. Any surprisingly firm tone could spark a sharp, temporary dollar rebound, so traders might consider buying short-dated put options on the EUR/USD to hedge against this event risk.
