The US dollar is falling in European morning trading. This drop follows comments from Fed governor Waller, who suggested a 25 basis point interest rate cut at the July FOMC meeting. He mentioned uncertainties about the long-term Fed Fund rate, which some estimate to be around 3%. These comments come just before the FOMC blackout period starts tomorrow, although Fed chair Powell is scheduled to speak next week. As a result of Waller’s remarks, the dollar is facing pressure, especially impacting the EUR/USD pair, which is testing important near-term levels.

Risks For The EUR/USD Pair

The EUR/USD pair is holding at the 100-hour moving average, but it may risk falling below this level soon. The key level to watch is 1.1632. If it breaks below this, the outlook may change to neutral. There are large options expirations for this pair at 1.1650, which could limit any gains today. If it moves higher, it could reach the 200-hour moving average, currently at 1.1670. Recent technical indicators show a decrease in dollar strength from past weeks, which might be a factor as the week ends. Given Waller’s dovish comments, we think traders should prepare for a weaker dollar soon. According to the CME FedWatch Tool, there is now over an 85% chance of a rate cut this month, supporting this view. These odds make derivative strategies that benefit from a falling dollar more appealing.

Opportunities in Buying Call Options

For those trading the EUR/USD pair, we see value in buying call options with strike prices above the key level of 1.1650. If the price breaks through this area, moving towards the 200-hour moving average at 1.1670, it would indicate that the dollar’s recent strength has really changed. This strategy plays directly into the weakening momentum shown by technical analysis. This outlook is backed by recent economic data. The latest Consumer Price Index report revealed that core inflation is cooling more than expected, reducing the urgency for the Federal Reserve to keep a tight policy. This economic situation adds credibility to a bearish dollar stance as we approach the central bank’s meeting. Historically, the U.S. dollar tends to weaken before and after the first rate cut in an easing cycle. We are likely entering that window, suggesting the trend of dollar weakness could last longer than just a few weeks. This pattern supports establishing derivative positions that could yield profits into late summer. However, we need to stay alert for Powell’s comments next week, as they come outside the usual blackout period. Any unexpectedly strong remarks could cause a sharp, temporary rebound in the dollar. Therefore, traders might consider buying short-term put options on the EUR/USD to protect against this risk. Create your live VT Markets account and start trading now.

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