The euro fell against the US dollar on Friday as short-covering in the greenback after Thursday’s sharp sell-off pushed EUR/USD back below 1.1500. The pair traded around 1.1488, down from a six-week high of 1.1537 set a day earlier. Geopolitical tensions in the Middle East and hawkish Federal Reserve expectations underpinned the dollar, with the US Dollar Index (DXY) at about 100.34, up 0.37% on the session. Markets are looking to the final University of Michigan consumer sentiment and inflation expectations readings due later on Friday.
The Fed held rates at 3.50%-3.75% on Wednesday, while three policymakers dissented in favour of an immediate 25-basis-point increase. Pricing via the CME FedWatch Tool implies a 66% probability of a 25-basis-point hike in September, with elevated oil prices seen as a source of inflation risk. In the euro area, July preliminary HICP inflation rose 2.9% year on year, matching forecasts and edging up from 2.8% in June, while core inflation increased to 2.5% from 2.4%. Societe Generale said the data remain consistent with the ECB’s June projection of 2.5% YoY for 3Q26, alongside a solid 2Q26 GDP print.
Volatility Opportunities in FX and Precious Metals
We suggest derivative traders prepare for increased volatility in the EUR/USD pair as both the Federal Reserve and the European Central Bank signal potential rate hikes in September. With the pair currently trading around 1.1488 and facing downward pressure, short-term put options on EUR/USD could capitalize on immediate US Dollar strength. Historical data shows that during periods of dual central bank tightening, currency volatility typically spikes by up to 20%, making volatility-buying strategies like straddles highly attractive.
Given the hawkish comments from Fed officials and a 66% probability of a September rate hike, we believe Gold is highly vulnerable to a downward correction. Rising interest rates increase the opportunity cost of holding non-yielding assets, which historically drags gold prices down during monetary tightening cycles. Traders should consider purchasing put options on Gold futures to hedge against this macroeconomic pressure as long as inflation risks remain tilted to the upside.
Interest Rate Futures as a Strategic Play
We also recommend focusing on short-term interest rate futures to exploit the shifting expectations between the US and Eurozone. With Eurozone core inflation rising to 2.5% and three Fed policymakers already pushing for immediate hikes, the gap between market pricing and central bank action is widening. Positioning in rate futures can help secure gains before the highly anticipated September policy meetings.
