EUR/USD rose to its highest level since June as the US Dollar weakened after the US Treasury said it would at least double liquidity-support buybacks of longer-dated nominal coupon securities across the 10-year to 20-year and 20-year to 30-year sectors. The maximum size of each operation will rise from $2 billion to at least $4 billion, pushing long-end Treasury prices higher and yields lower. The pair was trading near 1.1653, up 0.68%, while the US Dollar Index (DXY) sat around 99, down 0.65% and at its lowest since 1 June; the 30-year yield fell about 9 basis points to near 5.20% after topping 5.30% on Tuesday, its highest since 2007.
Rate expectations also shifted after softer recent US data, with attention turning to minutes from the Federal Open Market Committee’s July meeting. In the euro area, markets are widely positioned for an ECB rate rise in September, while final July HICP showed headline inflation up 0.2% month on month and core inflation confirmed at 2.5% year on year. The euro is used by 20 EU countries; in 2022 it accounted for 31% of FX turnover, averaging over $2.2 trillion daily. EUR/USD represents about 30% of trading, followed by EUR/JPY at 4%, EUR/GBP at 3% and EUR/AUD at 2%, while the ECB Governing Council meets eight times a year and the four largest economies make up 75% of Eurozone output.
Trading Opportunities from US Treasury Actions and Dollar Weakness
We are seeing a major shift in the currency markets as the EUR/USD pair surges to 1.1653, driven by the US Treasury’s aggressive bond buyback plan. By doubling its liquidity-support buybacks to at least $4 billion per operation, the US government has pushed the 30-year yield down to 5.20% and weakened the Greenback. Derivative traders should capitalize on this momentum by buying short-term EUR/USD call options to profit from the weakening US Dollar Index, which has slipped to 99.
ECB Rate Expectations and Strategic EUR/USD Trades
With the European Central Bank highly expected to raise interest rates this September to fight persistent inflation, the euro’s yield appeal is growing. Meanwhile, softer US economic data has forced market participants to scale back expectations of further Federal Reserve rate hikes. This widening policy divergence makes entering long EUR/USD futures contracts an attractive play for the coming weeks.
We also suggest exploring bull call spreads to mitigate the cost of volatility as the market awaits the upcoming FOMC meeting minutes. Historically, the EUR/USD pair dominates global currency volumes, accounting for roughly 30% of the massive $7.5 trillion daily foreign exchange market, which ensures deep liquidity for complex option strategies. Traders should set tight stop-losses near the 1.1580 support level to protect against any unexpected hawkish surprises from the Fed.
