The EUR/USD currency pair dropped over 0.8% on Tuesday, hitting its lowest level in almost three weeks. This drop came as hopes for a September rate cut by the Federal Reserve faded, following a rise in US CPI inflation for June. US Consumer Price Index inflation continued to rise toward the end of the second quarter. In June, the annual inflation rate reached 2.7%, surpassing the Federal Reserve’s 2% target and reducing expectations for a rate cut in the near future.

The Federal Reserve’s Rate Decisions

According to the CME’s FedWatch Tool, the market largely expects the Federal Reserve to keep rates steady in July. The chances of a rate cut in September have decreased to 44%, but there’s an 80% probability of two rate cuts in 2025. The Federal Reserve impacts the US economy by adjusting interest rates, focusing on inflation and employment goals. It uses various tools, such as Quantitative Easing during financial crises to ensure credit flow, which generally weakens the US Dollar. Conversely, Quantitative Tightening usually strengthens it. The Federal Open Market Committee, a part of the Federal Reserve, meets eight times a year to make monetary policy decisions. These decisions affect interest rates, the economy, and the value of the US Dollar.

Analyzing Currency Movement Strategies

The landscape has changed, and we need to adapt quickly. The recent decline in the currency pair is not just a momentary dip; it signals a significant adjustment. US inflation is still quite persistent. The latest June report showed a headline figure of 3.1%, down from May’s 3.3%, but still far from the Committee’s goal. Additionally, the job market is robust, with 209,000 jobs added in the latest report, making a near-term easing less likely. Powell has plenty of justification to keep rates higher for an extended period. Our strategy must shift to take advantage of this policy divergence. While the Fed remains firm, the European Central Bank has already cut its key rate in June. Lagarde is dealing with a softer economic backdrop, giving her more room to ease further. This creates a strong, favorable condition for the dollar against the euro. We see the EUR/USD path as likely heading lower. This means it’s time to actively seek short-side exposure. Instead of just shorting the spot market, we should explore the options market to manage our risk. We prefer buying puts or setting up bear put spreads on EUR/USD, aiming for levels below 1.0600 in the coming weeks. This allows us to profit from ongoing declines while limiting our maximum loss. Selling out-of-the-money call spreads is also a sound strategy for generating income, betting that any price rises will be brief and quickly reversed. Historically, the dollar stays strong until the Federal Reserve not only hints at a pivot but also starts cutting rates. We are not there yet. The market’s repositioning supports this; a quick look at the FedWatch tool shows that the chances of a September rate cut have fallen to below 40%, with increasing odds for just one cut by December, if that. The risk to this view could come from a sudden drop in US economic data, particularly if employment or retail sales numbers surprise downward. We’ll keep a close eye on these reports, but for now, the key trade is to position for a stronger dollar. The period of quantitative tightening and its positive impact on the greenback is not finished. Create your live VT Markets account and start trading now.

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