The EUR/USD pair has climbed 0.5% to 1.1814, marking its first rise above 1.1800 since July. This increase comes as market sentiment turns negative towards the dollar, with traders waiting for the decision from the Federal Open Market Committee (FOMC). This negative sentiment is also affecting other currency pairs. The USD/CHF has dropped 0.4% to 0.7910, while GBP/USD has increased by 0.3% to 1.3640. Many traders are ignoring significant option expiries, which indicates strong interest in the EUR/USD.

Dollar Struggles Amid Fed Expectations

The dollar’s difficulties are tied to what the Federal Reserve will announce tomorrow. Current market conditions are pressuring the greenback, raising doubts about the Fed’s upcoming decision. There is uncertainty about whether the Fed will meet expectations or take a more aggressive stance. These decisions could impact the growing sentiment we’ve seen this week. With EUR/USD moving above 1.1800, we’re testing levels not seen since mid-2024. This movement is mainly due to broad dollar weakness ahead of the important FOMC decision tomorrow. The market anticipates a dovish outlook from the Federal Reserve. This expectation is backed by recent data. The latest U.S. Consumer Price Index (CPI) for August 2025 showed a manageable 2.5%, which is within the Fed’s comfort zone. However, retail sales have fallen short of expectations for two months in a row. In contrast, Eurozone inflation remains high at 2.8%, which gives the European Central Bank less reason to adopt a dovish stance.

Implications for Derivative Traders

For derivative traders, this situation seems risky as the long Euro trade is getting crowded. Recent data from the CFTC shows that speculative net-long positions in the Euro are at their highest in over 18 months. This suggests a hawkish surprise from the Fed could cause a sharp reversal as traders adjust their positions. We should consider how the market reacted to Fed comments in 2023. A hawkish tone at that time led to a strong dollar rally despite signs of slowing growth. The question now is if this pattern will repeat. Any indication from the Fed that inflation is more concerning than growth could disrupt the current dollar decline. Given the uncertainty, implied volatility for EUR/USD options has increased before the announcement. Buying protective puts has become more costly but may be necessary for those holding long positions. Alternatively, we can explore call spreads to reduce the cost of betting on further gains while managing our risk in case of a Fed surprise. Create your live VT Markets account and start trading now.

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