Dollar Strength And Risk Aversion
Richmond Fed President Thomas Barkin referred to sticky inflation and said recent jobs figures show a solid labour market. He also said the balance of risks could change as inflation remains a concern. European Central Bank accounts showed policymakers kept interest rates unchanged and discussed inflation possibly moving further below the 2% target. The meeting occurred before tensions between the United States and Iran escalated, which has affected the outlook for energy-importing Europe. Friday’s Eurozone calendar includes employment data and GDP for the last quarter of 2025, alongside comments from ECB President Christine Lagarde. In the US, January retail sales and February Nonfarm Payrolls are due, with payrolls expected at 59K and unemployment seen at 4.3%. EUR/USD traded at 1.1609, with RSI at 33 and resistance at 1.1700/1.1720 then 1.1820. Support levels are 1.1615 and 1.1570/1.1550. The immediate outlook for EUR/USD is bearish, with the pair pressing towards the 1.1600 level as solid US economic data and global risk aversion strengthen the dollar. This environment suggests that we should consider strategies that benefit from a falling euro. We believe this downward pressure will continue in the coming weeks.Strategy And Event Risks
The recent strength in the US labor market, reminiscent of the surprisingly resilient job reports we saw throughout 2025, gives the Federal Reserve little reason to soften its stance. With the latest Consumer Price Index data showing core inflation stubbornly holding above 3%, policymakers will likely remain concerned about sticky prices. This policy divergence strongly favors the dollar over the euro for the foreseeable future. On the other side, the European Central Bank has signaled concerns that inflation could fall below its target, a stark contrast to the Fed’s position. This policy difference is reflected in the US-German 2-year yield spread, which has widened to over 180 basis points, making the dollar more attractive to hold. The region’s dependence on energy imports also makes it more vulnerable to the escalating US-Iran conflict, weighing heavily on the euro. Given this outlook, we believe buying EUR/USD put options is a prudent strategy to position for further downside, targeting a move toward the 1.1550 support band. For those with a more neutral-to-bearish view, selling call spreads with a ceiling around the formidable 1.1700 resistance could be an effective way to collect premium while defining risk. These positions allow for profit from either a continued slide or sideways consolidation. The upcoming US Nonfarm Payrolls report is the key event risk we are watching this week. While the consensus is a weak 59,000, any number significantly above 150,000 would likely validate the Fed’s cautious stance and could accelerate the EUR/USD decline. We should therefore be prepared for heightened volatility around the release and manage positions accordingly. Create your live VT Markets account and start trading now.
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