FxWirePro: Dollar on upper hand against euro despite manufacturing index to shrink – options strips best suitable

The euro area recovery remains fragile and the risks to growth and especially, inflation remain tilted to the downside. Since the last policy meeting in July, effective appreciation of the EUR, falling commodity prices, and an elevation of the risks to foreign growth have reduced the near- and medium-term inflation outlook and tightened overall financial conditions. We expect the ECB meeting discussion and possibly actions, to skew to the dovish side - suggesting that further EURUSD depreciation is imminent.

On the flip side, U.S. manufacturing sector momentum should continue to moderate in August, with the ISM manufacturing index edging slightly lower to 52.4 from 52.7. The modest deceleration in growth momentum should come from some pullback in production, new orders and employment activity, which have seen some strengthening over the past 3 months.

The level of inventories and deliveries should advance modestly, partially offsetting the decline in the other subcomponents. The new orders to inventory spread (a useful forward-looking proxy) will likely to fall into the negative territory, suggesting some further weakening in production activity in the coming months.

Despite the modest pullback, this report should continue to suggest that the economic recovery remains on a relatively solid footing, reflecting the constructive underlying tone in the US economy. The US is not immune from international growth concerns but it is likely least affected, and we continue to expect USD outperformance.

Hence, we reckon the EURUSD will comparatively make a significant move most likely in a downward direction. The EURUSD spot FX is flashing at 1.1229. Buy at the money 15D 0.51 delta calls (strike 1.1229) and it is recommended buying 1 lot (size 100,000). Two lots of at the money 1M -0.48 delta puts (same size 100,000 of each lot) are recommended on speculation basis.