Insights 
VT 
EUR/USD has regained the 1.1600 level, as the US Dollar weakens due to renewed tensions between the US and China and expectations of a more dovish Federal Reserve. The currency pair’s recovery follows its fall to intraday lows around 1.1542.
Influences on the Euro include French political dynamics, with Prime Minister Sébastien Lecornu facing challenges over the 2026 budget bill, and the European Central Bank’s cautious optimism. ECB President Christine Lagarde emphasised balanced economic risks and left the door open for possible rate cuts.
US-China Tensions
US-China tensions have intensified with Beijing’s new port fees and potential tariffs by Washington. This follows US plans for 100% tariffs on Chinese imports due to Beijing’s rare-earth export limits, creating concerns of a trade conflict.
Attention now shifts to Federal Reserve Chair Jerome Powell’s upcoming speech at the NABE Annual Meeting for monetary policy direction. Fed Governor Michelle Bowman anticipates two more rate cuts this year. Powell’s comments are crucial for understanding future economic policies amidst trade tensions.
We are seeing EUR/USD reclaim the 1.1600 level as the market prepares for Fed Chair Powell’s speech later today. The renewed trade friction between the US and China introduces significant uncertainty, making this a pivotal moment. Derivative traders should be positioning for a potential spike in volatility rather than a clear directional move in the coming weeks.
The primary driver for the dollar’s weakness is the expectation of a dovish Federal Reserve. Looking at the Fed funds futures market, we see an over 80% probability now priced in for at least two more quarter-point rate cuts by the end of the year. This suggests that buying call options on EUR/USD could be a viable strategy if Powell confirms this dovish stance.
Strategies for Traders
The escalating port fees and tariff threats create a playbook we remember from the 2018-2019 trade conflict. During that period, similar headlines caused the CBOE Volatility Index (VIX) to spike above 20 on multiple occasions, rewarding those who owned volatility. Long positions on the VIX or using straddles on major indices could provide a hedge against a sudden market downturn.
While the dollar is softening, we cannot ignore the headwinds facing the Euro, particularly the political instability in France. With recent Eurozone core inflation holding firmer around 2.8% compared to the US figure of 2.5%, the ECB has less immediate pressure to cut rates as aggressively as the Fed. This policy divergence is the main factor supporting the Euro for now, but any negative surprises from Europe could quickly cap gains.
Given the mix of a dovish Fed and European fiscal concerns, we believe option strategies are better suited for the coming weeks than outright futures positions. Traders bullish on the Fed’s dovishness could consider buying at-the-money EUR/USD call options to limit downside risk. Alternatively, purchasing a strangle could profit from a large price move in either direction following Powell’s remarks or any new trade headlines.
