EUR/USD jumped from 1.1391 to 1.1554, gaining over 1% due to US jobs data. The July Nonfarm Payrolls revealed only 73,000 new jobs, much lower than expected, which raised predictions for two Federal Reserve interest rate cuts by December. Wall Street experienced losses amid worries about a slowing US economy. Manufacturing activity contracted, and consumer sentiment saw a slight decline, contributing to a grim economic outlook.

Trading Expectations

Traders are anticipating a 62 basis point decrease in the federal funds rate by the end of the year. There’s a 76% likelihood of a 25 basis point cut in September. Meanwhile, EU inflation data exceeded expectations, with a Harmonized Index of Consumer Prices (HICP) at 2.4% year-over-year. The ISM Manufacturing PMI dropped to 48.0, indicating continued contraction. Although consumer sentiment improved, inflation expectations varied, reflecting mixed confidence in price stability. The EUR/USD is likely trending upwards, with resistance expected at 1.1600. If it surpasses the 20-day Simple Moving Average (SMA), it could reach 1.1700. However, a drop below the 50-day SMA might bring it down to 1.1500. The recent US jobs report showed a significant shortfall, with just 73,000 jobs added in July. This has shifted our view towards a weaker US dollar in the short term. We now anticipate significant Federal Reserve actions to support the slowing economy.

Policy Divergence and Strategy

The Fed is likely to cut rates twice this year, contrasting with the European Central Bank’s stance. Europe’s inflation remains steady, with the latest HICP data at 2.4%, giving the ECB little incentive to follow the Fed’s dovish route. This policy gap drives our strategy for the coming weeks. We’ve seen a similar situation before during the Fed’s policy shift in 2019, when concerns over growth led to three rate cuts, creating lasting pressure on the dollar. The current manufacturing contraction, reflected by the ISM PMI at 48.0, echoes that time. Amid uncertainty, implied volatility is rising, making options pricier yet more valuable. We should consider purchasing EUR/USD call options to tap into the potential upside toward the 1.1700 level. This method effectively limits our downside risk if the market shifts unexpectedly. For a more budget-friendly option, we can use bull call spreads on the EUR/USD. By buying a call option just above the current price and selling another at the 1.1700 resistance target, we can reduce our costs. This specifically focuses on the anticipated rally while defining our risk and reward. Next, we’ll keep an eye on upcoming US inflation and consumer sentiment reports. According to the CME’s FedWatch Tool, there’s a 76% chance of a September rate cut. If data confirms US economic weakness, it could hasten the dollar’s decline and strengthen our position. Create your live VT Markets account and start trading now.

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