EUR/USD Trading Strategy: Puts Favored Amid Dollar Strength
With the US Dollar Index recovering to 101.42 and EUR/USD slipping toward 1.1377, we recommend that derivative traders purchase short-term EUR/USD put options. The combination of strong US business activity—backed by the July Composite PMI rising to 53.6—and new US tariffs of up to 12.5% will keep the Euro under heavy pressure. Historically, a widening US-Eurozone PMI growth spread correlates with a 1.5% average depreciation in the EUR/USD pair over the following month.
Portfolio Protection and Opportunities: WTI Bull Call Spreads and Eurozone Rate Futures
To protect portfolios from geopolitical shocks, we advise entering bull call spreads on WTI crude oil. Oil prices have surged nearly 8% this week as conflict threatens vital shipping routes like the Strait of Hormuz, which carries over 20 million barrels of oil per day. These rising energy costs will likely sustain high inflation, cementing the market’s 80% expectation of a Federal Reserve rate hike in September.
Finally, we favor a long bias on EUR front-end interest rate futures to capitalize on the European Central Bank’s monetary policy path. The ECB recently kept its deposit rate at 2.25% but left the door open for a September hike, which is not yet fully priced in by the market. Since the Eurozone Composite PMI beat expectations at 51.9, short-term Euro rates offer an attractive risk-reward profile compared to US interest rate derivatives.
EUR/USD gave back earlier gains on Friday as the widening Middle East war and firmer expectations for a hawkish Federal Reserve kept the US Dollar near recent highs. The pair traded around 1.1377, close to a three-week low, after touching an intraday peak of 1.1401. Support for the Greenback followed stronger US activity data: the preliminary S&P Global Composite PMI rose to 53.6 in July from 51.9 in June, and the Services PMI also increased to 53.6 from 51.2, while the Manufacturing PMI eased to 53.8 from 53.9. The US Dollar Index (DXY) was near 101.42 after an intraday low of 101.25.
Energy and trade developments added to inflation-focused pricing. WTI was up nearly 8% on the week, with the conflict threatening shipping via the Strait of Hormuz and Bab el-Mandeb, and the US announced fresh tariffs of 10% and 12.5% on imports from 60 trading partners. CME FedWatch showed an 80% probability of a September rate hike, while the Fed was expected to hold rates at its 28–29 July meeting. In the Eurozone, the preliminary HCOB Composite PMI rose to 51.9 from 50.0, above the 50.2 forecast; Services climbed to 51.6 from 49.4 and Manufacturing to 52.0 from 51.4. The ECB left the deposit rate at 2.25% and reiterated a meeting-by-meeting approach, keeping the option of a September hike in view.
