Struggle for Supremacy Between Europe and America: Does EUR Still Have Room to Rise?

Morning FX

Last week, EURUSD surged with two consecutive bullish candles, rising 150 pips. It looked ready to break upwards, but technically, the 100-day and 200-day moving averages act as resistance. Does EURUSD still have room to rise?

1. Reasons for the short-term strength of the euro

The latest rise in EURUSD is the result of three factors: fundamentals, news, and policy.

• From a fundamental perspective, since the ceasefire agreement between the US and Iran in May, European economic expectations have improved significantly. The gap between the economic surprise indices of the US and Europe has narrowed quickly, and the recent renewed conflicts have had almost no impact. In fact, the rally has even outpaced the rise in the EURUSD exchange rate.

• On the news front, the temporary ceasefire agreement between the US and Iran reported on July 25 pulled international oil prices back below 90, significantly reducing the risk of the euro falling. However, at the time, the market was concerned about a hawkish FOMC, so the positive news was not fully priced in EURUSD.

• On the policy front, last week's joint intervention by the US and Japan in the yen exchange rate and selling of the US dollar indirectly benefited all non-dollar currencies, including the euro. Although these moves were artificially drawn lines, they just happened to mark a perfect "W" bottom in EURUSD’s technical picture.

2. The logic for a continued euro rise in the medium term is still unclear On one hand, it’s becoming increasingly difficult for the economic gap between the US and Europe to further narrow. In terms of absolute strength, the US still significantly outperforms Europe in employment, consumption, and AI technology. The US July ISM Manufacturing PMI, released last night and reaching its highest level since May 2022, again demonstrates that the US remains strong. On the other hand, regarding future differences in monetary policy, though the dovish stance of Waller at the Federal Reserve is clear, there are still many hawkish voting members on the committee. Therefore, I believe the current market expectation of a 35bp Fed hike this year is relatively reasonable. As for the European Central Bank, its hawkishness does not reach the market expectation of a 40bp hike this year. I tend to believe the ECB will hike once more this year, and short-end rates still have room to fall. 3. View summary and trading strategy

• The short-term euro rise is in line with fundamental, news, and policy impacts, but no convincing logic is seen for a further medium-term breakout upward. The 1.15-1.16 range is currently only the "area of positive realization" rather than the "starting point of a trend." Watch this Friday’s Non-Farm Payrolls to see if it signals a breakout for EURUSD or a pullback after good news.
• In terms of trading, I am willing to tactically short the euro around 1.1550 in the short term, with a preference for EURUSD or EURCNY. If concerned about tail risk of a euro breakout and rally, consider buying EURUSD 25D RR expiring within 3M as a hedge.