The Euro has weakened by 0.7% against the US Dollar, performing worse than all G10 currencies except the New Zealand Dollar. This decline follows a new US-EU trade agreement establishing a 15% tariff on most US imports from the EU. This trade deal impacts the European Central Bank (ECB), which recently moved to a neutral stance, stepping back from a dovish outlook due to trade uncertainties. Technical indicators suggest a medium-term bullish trend, with EUR/USD currently trading above the 50-day moving average at 1.1566. Support is near 1.1620, while resistance is at 1.1720.

Technical Analysis Of EUR/USD

After the trade agreement, EUR/USD is moving down towards 1.1650. Meanwhile, GBP/USD is also dropping towards 1.3400, driven by a stronger US Dollar. Gold prices remain below $3,350 as rising US Treasury yields and improving risk sentiment discourage buyers. Next week looks busy, with a trade deadline on August 1, the Federal Reserve likely maintaining interest rates, and expected strength in Nonfarm Payrolls. Although the economy shows strength, there are worries that the Fed may have waited too long to cut rates, especially with labor market concerns. Given the new 15% tariff and resulting pressure, traders should expect the Euro to weaken further against the US Dollar. Buying EUR/USD put options with strike prices below the 1.1620 support level is a smart way to bet on a continued decline. This approach takes advantage of the negative sentiment caused by the trade agreement. The ECB’s recent rate cut in June, the first since 2019, creates a clear policy difference from the Federal Reserve, reinforcing our bearish outlook. This is supported by recent data showing that the US economy added a surprising 272,000 jobs, strengthening the Dollar. Therefore, we expect a move towards or below the 50-day moving average is very likely.

Risk Management Strategies

For those concerned about a potential rebound, we recommend using a bear put spread instead of a direct short position. This options strategy reduces risk and lowers initial costs while still allowing for profits if the Euro falls. It’s a wise move since medium-term technical signals still show some bullish tendencies. The Dollar’s strength is also impacting other pairs, making the British Pound weaker. Traders might consider a similar strategy by buying puts on GBP/USD. Historical trends suggest that broad rallies in the Dollar, fueled by US economic strength, often weigh down most G10 currencies at once. We recommend against starting new long positions in gold, which is struggling to stay around $2,320 per ounce. Rising US Treasury yields make this non-yielding asset less attractive to investors looking for returns. This connection—where a strong dollar and higher yields hinder precious metals—is a well-known market trend. Key events in the upcoming week, especially the Federal Reserve meeting, are crucial for this strategy. The CME FedWatch tool indicates that markets expect rates to stay the same, so attention will be on the Fed’s future guidance. Any suggestions from the Fed that it has postponed rate cuts for too long could push the Dollar higher and support bearish derivative positions on the Euro. Create your live VT Markets account and start trading now.

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The Canadian Dollar is down by 0.2% against the US Dollar but remains stronger than other G10 currencies. This change comes as markets get ready for the Bank of Canada (BoC) policy decision on Wednesday, where they are expected to keep rates steady at 2.75%. The BoC is slightly cautious due to worries about trade and global growth. However, strong signs of persistent inflation and a resilient domestic economy, like the good employment figures from June, help balance things out.

USDCAD Trading Range

USD/CAD has been trading steadily since early June. Support is currently below 1.3600 while resistance is above 1.3750. The Relative Strength Index (RSI) is at 50, showing limited momentum, but recent gains suggest there might be a break above the 50-day moving average at 1.3697. For the near future, traders should watch for support below 1.3680 and resistance above 1.3780. These levels are crucial for tracking the currency pair’s movements and potential market changes. We advise derivative traders to focus on the upcoming policy decision as a key market driver. The central bank is expected to keep its main interest rate at 5.00% after being the first G7 country to cut rates in June, which supports the slightly cautious outlook due to global growth concerns.

Traders Strategy Insights

The case for keeping rates steady is mixed, presenting opportunities for traders. In May, Canada’s headline inflation decreased to 2.9%, falling within the target range and promoting a patient approach. However, the job market showed some weakness, as the unemployment rate rose to 6.2% despite a slight increase in jobs. Given the stable trading range of the currency pair and a neutral RSI, we suggest considering strategies that could benefit from a potential breakout. Buying a strangle or straddle with options expiring shortly after the announcement could take advantage of expected volatility. Usually, policy announcements lead to sharp movements after periods of consolidation. For traders with a specific outlook, key levels should guide their strategies. A surprising dovish statement might push the pair towards resistance above 1.3780, favoring long calls. Conversely, any unexpectedly hawkish remarks emphasizing inflation could lead the pair to test support below 1.3680, making put options more appealing. Create your live VT Markets account and start trading now.

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The U.S. Treasury is set to auction $70 billion in 5-year notes. The recent auction for 2-year notes saw moderate interest, with strong participation from U.S. investors but less engagement from international buyers. Over the past six months, here are some key stats from these auctions: – The tail averaged -0.3 basis points. – The bid-to-cover ratio was 2.39 times. – Participation included 18.9% from direct buyers, 70.1% from indirect buyers, and 11.0% from dealers.

Watch Upcoming Auction Results

Given the low foreign interest in the recent 2-year auction, we are keeping a close eye on the upcoming 5-year auction results. Domestic demand has been strong, but if the indirect bid drops significantly below its average of 70.1%, it might indicate that global investors are starting to doubt U.S. debt levels at current yields. Notably, the May 28th 5-year auction had solid demand with a bid-to-cover of 2.49x, but we view this as a temporary spike, not a new trend. This uncertainty in the bond market coincides with statements from Federal Reserve officials. Minneapolis Fed President Kashkari recently said he needs to see “many more months” of positive inflation data before thinking about a rate cut, dampening hopes for an imminent reduction. His comments support the market’s “higher for longer” viewpoint, suggesting that yields may continue to rise. As a result, we recommend that derivative traders consider options that profit from persistently high or increasing interest rates. This could involve buying puts on long-duration bond ETFs or using options on Secured Overnight Financing Rate (SOFR) futures to bet against near-term rate cuts. According to the CME FedWatch Tool, the market is now expecting the first full rate cut in November 2024, which is a significant delay from previous predictions.

Implications for Equities and the Dollar

This outlook on interest rates creates a cautious environment for equities. We see value in purchasing protective puts on major stock indices, as higher borrowing costs can reduce corporate earnings and valuations. For instance, the 7-year Treasury auction in February 2021 caused a sharp, if brief, sell-off in technology stocks due to a surge in yields. Additionally, if we see continued weak foreign demand in upcoming auctions, it poses a complicated scenario for the U.S. dollar. While this might reflect declining confidence in U.S. fiscal health, it could also lead to a stronger dollar as investors seek safety during global risk-off sentiments. We are preparing for increased volatility in currency markets, particularly for pairs sensitive to U.S. interest rate changes. Create your live VT Markets account and start trading now.

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The Pound Sterling (GBP) dropped to around 1.3400 against the US Dollar (USD) during the European session on Monday. This fall happened as the US Dollar gained strength after a new trade framework was announced between the US and the EU. The US Dollar Index approached 97.90. The trade deal with the EU cuts baseline tariffs on imports from Brussels to 15%, which is half of what was previously suggested. This trade agreement has increased interest in riskier investments. However, risk-sensitive currencies are struggling to benefit from the US Dollar’s improved outlook. The deal has eased concerns about the upcoming tariff deadline on August 1, with the US securing agreements with several trading partners, excluding Canada and Mexico. US-China trade talks in Stockholm are expected to extend their tariff pause for 90 days past August 12. According to the South China Morning Post, Washington and Beijing may reach an agreement. The Pound Sterling is gaining against other currencies, except the US Dollar, despite a quiet economic calendar in the UK. Market expectations are leaning toward a 25 basis point interest rate cut by the Bank of England, influenced by a slowdown in the UK job market. Federal Reserve announcements on Wednesday could affect the GBP/USD pair. The Fed is likely to keep interest rates steady, and investors will closely watch comments from Chair Jerome Powell for clues about future monetary policy. The Pound is still pressured against the US Dollar, trading below its 20 and 50-day Exponential Moving Averages (EMAs). A Head and Shoulders chart pattern suggests a bearish outlook, with the neckline close to 1.3413 and key support at 1.3140. Given the strengthening US Dollar, we expect that market traders will see further declines for the Pound. The US Dollar Index has recently surpassed 106, its highest in several months, as the new trade deal with the EU has removed significant economic uncertainty. This renewed faith in the US economy benefits the Dollar. The positive trade outlook also influences the anticipation surrounding the talks with China, which should further ease global risk. Typically, when US trade uncertainties decrease, capital first flows into dollar-denominated assets before moving to riskier currencies. This helps explain why the Dollar is outperforming even in a risk-accepting environment. Conversely, the Pound shows signs of weakness. Recent data from the Office for National Statistics reveals that UK wage growth has slowed for the third month in a row, reinforcing expectations of a Bank of England interest rate cut. This difference in policy direction compared to a stable American central bank creates strong challenges for the Pound. We are closely monitoring the monetary policy announcements on Wednesday for insights. The CME FedWatch Tool indicates that markets expect over a 90% chance of stable interest rates, making the Chair’s remarks particularly significant. His comments will be analyzed for any potential changes in the central bank’s future policy. Given the bearish Head and Shoulders chart pattern, this presents a clear opportunity to position for further declines. Traders can consider buying put options on the GBP/USD pair with strike prices below the 1.3400 neckline, allowing for profits if prices drop toward the key support level. A clear break below the 1.3140 support level would confirm negative momentum and likely lead to more selling. From historical price movements, the next major support area is around the important psychological level of 1.3000. We would see a break of the current support level as a signal to increase short positions.

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The US Dollar (USD) is likely to strengthen further against the Japanese Yen (JPY), but it’s expected to remain within the 147.25 to 148.25 range. For a significant rise to happen, the USD needs to close above 148.25 without falling below the strong support level at 146.65. In the short term, recent trading showed the USD dropping to 145.82 before bouncing back to a high of 147.94, ultimately closing at 147.66. This rebound indicates that the USD is currently moving within the 147.25 to 148.25 range.

Short Term Momentum

Looking at the next 1-3 weeks, the USD has experienced a slight downward trend, but that momentum is fading as upward movement starts to pick up. To push above the current range, the USD must close above 148.25. If that happens, there’s a chance it could rise to 149.20, assuming the support at 146.65 remains intact. The broader economic picture is changing due to trade agreements, market pressures, and actions by central banks. These factors may influence currency movements and investment choices. It’s important to manage risks and conduct market research because of the uncertainties and potential losses in trading. Given that we expect the currency pair to remain within a narrow band, we recommend selling volatility using options strategies as a key approach. An iron condor, with strike prices set outside the 147.25 to 148.25 range, could be beneficial, as it takes advantage of the expected lack of significant price movement. This strategy earns profits from time decay if the currency stays within the targeted levels.

Economic Foundations

Recent US economic data supports a robust dollar. The US Consumer Price Index in January was higher than anticipated at 3.1%, reducing the chances of immediate Federal Reserve rate cuts. This consistent interest rate advantage over Japan creates a strong base for the currency pair, making it less likely to breach the 146.65 support level. On the other hand, Japan’s economy entered a technical recession at the end of 2023 after two straight quarters of negative GDP growth. This economic weakness limits the Bank of Japan’s ability to tighten monetary policy significantly, keeping interest rates low. The resultant weakness of the yen suggests that a sharp drop in the pair is unlikely for now. If upward momentum grows and the USD closes above 148.25, we would begin purchasing call options to aim for a rise to 149.20. It’s essential to note that when the exchange rate exceeded 150 in late 2023, it prompted intervention warnings from Japanese officials. This history creates a psychological barrier that may limit any substantial rally. Create your live VT Markets account and start trading now.

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The EUR/USD is on a steady decline, with only small upward corrections, indicating a clear downward trend. The pair has fallen below an important swing area between 1.1614 and 1.16309, which now acts as a risk marker for sellers. Staying below this range points to a bearish outlook. Next targets to watch are a minor support zone between 1.1555 and 1.1561. Furthermore, the level of 1.15378 represents the 38.2% retracement of the rally from May to July, making it a key target if the decline continues.

Moving Average Analysis

On the 5-minute chart, the 100-bar moving average is falling and currently at around 1.16475. This average sets the short-term risk. If the price rises above 1.16309 but doesn’t stay above the 100-bar MA, this supports a bearish outlook. The rapidly declining average is approaching the 1.1630 level, reinforcing this bearish sentiment. Given the strong downward momentum, we believe traders should prepare for further declines in the coming weeks. This is mainly due to the widening gap in policies between the US Federal Reserve and the European Central Bank. This difference makes the US dollar more appealing than the euro, putting ongoing pressure on the pair. Supporting this view, recent data indicates that US inflation in March remained stubbornly high at 3.5%, which pushes back the timeline for expected Fed rate cuts. In contrast, Eurozone inflation has dropped to 2.4%, raising the odds that the ECB might lower rates as soon as June. This fundamental mismatch supports a continued downward trend for the currency pair. For traders, this environment favors strategies that benefit from falling prices or limited gains. Buying put options to bet on a drop toward the next key support levels is a good idea. Alternatively, selling out-of-the-money call spreads can generate income while betting that any upward movements will be limited.

Managing Positions and Historical Context

The identified key swing area is crucial for managing these positions. If the price fails to break back above this ceiling, it reinforces the need to hold or add to bearish positions. The declining short-term moving average can also help time new entries during any minor intraday price bounces. Historically, significant differences in monetary policy, like those seen in 2014 and 2022, have caused prolonged declines in the pair. The current economic situation is quite similar, suggesting that a move toward the 38.2% retracement target is likely. Therefore, we should be skeptical of any corrective rallies unless there’s a fundamental shift in the underlying economic data. Create your live VT Markets account and start trading now.

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The AUD/USD pair has dropped nearly 0.6%, now sitting around 0.6500. This decrease comes after the US dollar gained value following a new trade agreement between the US and the EU. The trade deal includes a reduction in US tariffs on EU imports from a threatening 30% to a more favorable 15%. While this agreement boosts market conditions for riskier assets, the strong US dollar has lessened demand for these assets.

US Dollar Index

The US Dollar Index (DXY), which compares the dollar to six major currencies, reached about 98.30, its highest in a week. Attention in the market will shift to upcoming US economic data, including the PCE Price Index and preliminary GDP figures, along with updates on the Federal Reserve’s monetary policy. In Australia, the Q2 Consumer Price Index (CPI) report is expected soon, likely showing moderate price growth. If inflation remains low, it may impact market expectations for interest rate changes by the Reserve Bank of Australia. With the AUD/USD pair sliding towards 0.6500, derivative traders should prepare for ongoing downward pressure or increased volatility. The strong US dollar, influenced by the positive trade news, poses a significant challenge for the Australian dollar. In this environment, buying put options is a straightforward way to anticipate further declines. The US dollar’s strength is supported by solid data, with the core PCE inflation rate holding steady at 2.8%. This keeps the Federal Reserve cautious. Currently, markets suggest less than a 50% chance of an interest rate cut by September, according to the CME FedWatch Tool, which reinforces the dollar’s yield advantage over other currencies.

Economic Outlook for Australia

In contrast, Australia’s economic outlook is less certain. The latest quarterly inflation rate was 3.6%, still too high for its central bank to be comfortable. Additionally, weak retail sales data indicates a fragile economy, making further interest rate hikes a risky move for policymakers. This difference in central bank policies and economic strength is a recipe for currency weakness. We see a strong case for using option strategies like bear put spreads to take advantage of a possible pull towards the 0.6400 level. This approach would minimize upfront costs while allowing exposure to a downward trend. Historically, when the Fed has maintained a stricter policy than the Reserve Bank of Australia, the AUD/USD has faced challenges. During the 2022 tightening cycle, this situation led to the pair dropping below 0.6300. We expect this historical trend to influence trading behavior in the upcoming weeks. Create your live VT Markets account and start trading now.

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The US Dollar is gaining strength against several major currencies, thanks in part to a recent trade deal between the US and EU. Currencies like the NZD, EUR, and CHF are weakening, while the AUD and JPY are also seeing declines. The GBP, CAD, and CNH are experiencing slight drops. Equity futures are hitting record highs, and the US 10Y yield remains steady at about 4.40%. In the commodities market, oil is stabilizing above $65 per barrel, while copper and gold are struggling, facing the risk of further declines.

Upcoming Economic Events

This week, important economic events are expected, including the FOMC meeting, PCE inflation data, and the nonfarm payrolls report. The Federal Reserve is likely to keep interest rates steady, but there may be some dovish dissent from board members. In other developments, EUR/USD continues to drop towards 1.1650 after the trade deal, indicating the strength of the USD. GBP/USD is also declining towards 1.3400 due to changes in economic outlook. Gold is trading below $3,350 as investor sentiment improves following the trade deal between the EU and US. Given the US dollar’s strength, traders might want to position for potential gains in the derivative markets. One option is to buy call options on the U.S. Dollar Index (DXY), which has remained above the 105 level recently. This strategy lets traders profit if G10 currencies keep underperforming against the dollar while managing risk. With equity indexes climbing, such as the S&P 500 recently exceeding 5,300, taking long positions carries risks. We recommend using bull call spreads on major index futures to seize gains while limiting losses. The CBOE Volatility Index (VIX) is currently near a low of 12, making options cheaper for these strategies.

Central Bank Meeting and Inflation Data

The upcoming central bank meeting and inflation data are key events that will affect interest rate expectations. According to the CME FedWatch Tool, markets are predicting less than a 50% chance of a rate cut by September, a significant shift from earlier projections this year. We believe any unexpected hawkish comments from Powell could lead to option positioning on 10-year Treasury note futures. The cautious trading in precious metals provides a chance for bearish strategies. With gold pulling back from recent highs above $2,400 per ounce, buying put options on gold futures or related ETFs could be a smart hedge against ongoing risk-on market conditions. In the energy sector, as crude oil hovers around $80 per barrel, traders might think about selling covered calls to generate income while waiting for a clearer trend. As we anticipate potential market movements around the jobs report, strategies that benefit from increased volatility may be valuable. Historically, a significant deviation in the nonfarm payroll numbers can lead to sharp market shifts. A long straddle using options on a currency pair like EUR/USD could be a sensible way to prepare for a big price move, no matter the direction. Create your live VT Markets account and start trading now.

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The new tariff agreement between the European Union (EU) and the United States introduces a 15% base tariff on most EU exports, including cars, semiconductors, and pharmaceuticals. In return, the EU will buy $750 billion worth of U.S. energy and military equipment. While some European leaders welcome the stability this deal may bring, there are worries about its fit with the “America First” trade policy. The final details of the agreement are still being worked out and have not been completed.

Market Responses

In the stock market, major European indices reacted differently. The German DAX experienced the largest drop at 1.13%. France’s CAC and the UK’s FTSE 100 both decreased by 0.43%, while Spain’s Ibex fell by 0.12%. Italy’s FTSE MIB remained unchanged. We think the market’s mixed and negative reaction indicates that the agreement may create more uncertainty than it solves. The unresolved terms mean there will be headline risk, leading to possibly undervalued implied volatility. Derivative traders should prepare for wider price swings across major European indices. The sharp decline in the German index reflects market worries about the new terms, especially for its export-driven economy. With nearly 500,000 German cars set to be exported to the U.S. in 2023, a 15% tariff threatens corporate earnings. This situation presents a clear opportunity to buy put options on the DAX or an ETF that tracks European automakers.

Volatility And Trading Strategies

Historically, trade negotiations, such as the U.S.-China disputes from 2018-2019, led to significant spikes in volatility indices. The Euro Stoxx 50 Volatility Index (VSTOXX) is currently around 15, which is low compared to historical market stress levels. We expect this number to rise, making long volatility positions, like straddles on the CAC or Euro Stoxx 50, appealing due to the upcoming uncertainty. The flat performance of the Italian market suggests it might be seen as more insulated. However, the extensive tariffs on semiconductors and pharmaceuticals will likely create challenges for Italy too. The EU’s large energy purchases could also lead to inflation, applying pressure on European companies. As a result, we recommend selling out-of-the-money call spreads on broader indices, as this strategy could benefit from a stable or declining market. Create your live VT Markets account and start trading now.

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The Dow Jones index futures increased by 0.5%, surpassing 45,000, a level we haven’t seen since December and January. This rise happened after similar peaks in the S&P 500 and Nasdaq-100, showing that high-tech companies are leading these indices. The Greed and Fear Index has been swinging between extreme greed, currently sitting at 74, since early July. The VIX index stays neutral, while the put-call ratio shows signs of greed. Despite this, the current indicators don’t suggest it’s time to sell.

Buffett Indicator And Market Trends

The “Buffett indicator” shows that market capitalisation is at all-time highs compared to GDP, levels not seen since 2008 and 2000. Even with heightened fear and greed, high short squeezes remind us of the market’s unpredictable nature. The RSI is at 64, implying further potential for a rally. Earlier this month, the 50-day moving average crossed above the 200-day moving average, known as a “golden cross.” This usually signals a long-term positive trend. Recent trade agreements have eased market worries and boosted local investments, helping market growth. Even though market levels are high, sharp increases could still happen. It may be a good time to close long positions if supported by significant news. This week, the Fed’s rate decision and employment data are crucial events to watch. We view the Dow’s recent rise as a part of a larger rally, with the S&P 500 recently exceeding the 5,400 mark for the first time. This broad strength indicates a new phase in the bull market that goes beyond just tech companies. For derivatives, this environment favors strategies like selling cash-secured puts on major indices or holding long call positions.

Sentiment And Strategy Adjustments

The sentiment gauge is firmly in “Extreme Greed,” recently reaching 78, while the CBOE Volatility Index remains low, around 12. This suggests that the market is complacent, but it shouldn’t be seen as a direct sell signal. The combination of high prices and low volatility is ideal for traders using covered call strategies to earn income from their existing stock holdings. Although Mr. Buffett’s high market-cap-to-GDP ratio suggests long-term valuation risk, current momentum indicators tell a different short-term story. The put-call ratio recently dropped to 0.65, showing bullish activity in the options market. Therefore, we should be cautious about taking large short positions. Historically, going against strong positive momentum without a clear reason has been a losing strategy. The recent “golden cross” gives a strong technical advantage, indicating that this uptrend may continue. We are now watching the Federal Reserve’s upcoming rate decision, with markets suggesting a 99% chance of a rate hold, and the following jobs report. A dovish pause from the central bank, after a rate hike cycle, has usually been a bullish signal for stocks in the months that follow. Given the mixed signals of high valuation and strong momentum, we recommend that traders stay flexible rather than making big bets in one direction. This could be a good time to trim some highly profitable long call positions to secure gains before critical data releases. Using strategies like call debit spreads can enable continued participation in possible gains while managing risk. Create your live VT Markets account and start trading now.

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