EUR/USD has bounced back to the 1.1600 level as the US Dollar weakens. This drop comes in response to rising tensions between the US and China and expectations that the Federal Reserve may adopt a softer stance on interest rates. Before this recovery, the currency pair hit intraday lows near 1.1542. Factors affecting the Euro include French politics, where Prime Minister Sébastien Lecornu is facing hurdles over the 2026 budget bill, along with a cautious outlook from the European Central Bank (ECB). ECB President Christine Lagarde pointed out that economic risks are balanced and hinted at possible rate cuts.

US-China Tensions

Tensions between the US and China have escalated. Beijing has introduced new port fees, and Washington may impose tariffs as a response. This follows US plans for 100% tariffs on Chinese imports due to Beijing’s controls on rare-earth exports, raising fears of a trade war. Focus now shifts to Federal Reserve Chair Jerome Powell’s upcoming speech at the NABE Annual Meeting, which will guide monetary policy. Fed Governor Michelle Bowman expects two more rate cuts this year. Powell’s insights will be critical to understanding future economic policies amid trade tensions. Currently, EUR/USD is regaining the 1.1600 level as the market awaits Powell’s speech later today. The renewed trade friction between the US and China brings significant uncertainty, making this a crucial moment. Traders may want to prepare for increased volatility rather than a strong market direction in the coming weeks. The US Dollar’s weakness mainly stems from expectations of a dovish Federal Reserve. Looking at Fed funds futures, there’s now over an 80% chance of at least two rate cuts of a quarter-point by year’s end. This indicates that buying call options on EUR/USD might be a good strategy if Powell endorses this dovish outlook.

Strategies for Traders

The rise in port fees and tariff threats brings back memories of the 2018-2019 trade conflict. During that time, similar news caused the CBOE Volatility Index (VIX) to spike above 20 numerous times, benefiting those who invested in volatility. Taking long positions on the VIX or using straddles on major indices could protect against sudden market downturns. While the dollar weakens, we should consider the challenges facing the Euro, especially the political instability in France. Recently, Eurozone core inflation has remained steady at around 2.8%, compared to the US rate of 2.5%. This gives the ECB less urgency to cut rates as aggressively as the Fed. This difference in policies currently supports the Euro, but any negative news from Europe could limit its gains. Given the combination of a dovish Fed and uncertainty around European politics, we think options strategies are more appropriate for the coming weeks than direct futures positions. Traders optimistic about the Fed’s dovishness might consider buying at-the-money EUR/USD call options to manage risk. Alternatively, purchasing a strangle could provide profits from significant price movements in either direction after Powell’s comments or any new trade updates. Create your live VT Markets account and start trading now.

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