The EUR/USD pair is staying strong near weekly highs because the US Dollar is weak. This weakness comes from disappointing data in the services sector, raising concerns about the US economy. Fears of stagflation keep the Dollar down, while weak European retail data does not help the Euro much. Currently, the Euro is at 1.1580, recovering from a low of 1.1530 on Tuesday. This recovery follows a poor US Nonfarm Payrolls report, which has led to increased expectations of a possible Federal Reserve interest rate cut.

US Economic Challenges

Recent data on US services PMI shows a slowdown in activity and a drop in employment, with prices hitting a three-year high. This suggests that tariffs are impacting both growth and inflation, complicating the Fed’s decisions on interest rates. There is speculation about President Trump’s potential choices for Federal Reserve Governors, including the possibility of replacing Chairman Jerome Powell. This could weaken the independence of the Fed and apply more pressure on the Dollar. Attention is also on Eurozone retail sales figures, as Federal Reserve officials will discuss recent US data, which could influence decisions in the upcoming September monetary policy meeting. The Euro is holding its ground against the Japanese Yen and remains stable against other currencies. The movement of EUR/USD will depend on future economic indicators and the sentiment surrounding US policy and global economic data.

Market Dynamics and Strategy

As we begin August 2025, the US Dollar is showing some weakness. The EUR/USD pair is currently trading around 1.0850. The latest US ISM Services PMI for July stands at 52.9, indicating growth, but at a slower rate than earlier in the year. We are closely monitoring for any signs of slowdown, similar to previous concerns. We see similarities to late 2018, when fears of stagflation and slowing U.S. growth pushed EUR/USD above 1.1500. Then, disappointing data prompted significant policy shifts. The current market is different, but we remain cautious due to how quickly sentiment can shift. The Federal Reserve’s actions following the 2018-2019 weakness are crucial. They moved from raising rates to cutting them in July 2019, confirming the market’s concerns. With inflation moderating through 2024 and recent job growth meeting but not exceeding expectations, traders expect a stable Fed for now. However, any major downturn in upcoming data could reignite speculation about rate cuts. On the Euro side, there is a lack of momentum, as June retail sales in the Eurozone fell by 0.3%. The European Central Bank has been less aggressive with its policy compared to the Fed recently. This means the EUR/USD direction heavily relies on which economy shows more significant signs of weakness first. Given the potential for sharp movements based on central bank actions, we believe that buying volatility is a wise strategy for the upcoming weeks. We are considering purchasing EUR/USD straddles with a September expiration, which could profit from a big price move in either direction. This strategy prepares us for the uncertainty surrounding the upcoming Jackson Hole Symposium and the September central bank meetings. In a more directional approach, we think the risk of a weakening US economy is slightly higher than that in the Eurozone at this moment. Thus, buying out-of-the-money EUR/USD call options with an October expiry provides a defined way to bet on possible US Dollar weakness. This strategy would let us profit from a rally in the pair if upcoming U.S. data disappoints further. Create your live VT Markets account and start trading now.

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