RBC believes that the chances of an ECB rate cut are lessening because the eurozone’s growth outlook looks stable. At the same time, the Federal Reserve is lowering rates, making it cheaper to hedge against the dollar’s decline globally. This change is leading to more investment flowing into Europe.

Stronger Euro and Inflation

A stronger euro may help lower inflation pressures, which could reduce the need for the ECB to cut rates further. Stable policies can attract more investment to European assets, but a stronger euro could create challenges for exporters, leading to mixed effects on stocks. We expect the euro to keep strengthening against the U.S. dollar, aiming for $1.24 by late next year. Currently, the euro is at $1.2150, suggesting the market is already anticipating this shift, but there’s still potential for change. The key factor is the difference in monetary policy between a steady European Central Bank and a Federal Reserve that is easing. Earlier this month, the Federal Reserve cut its key interest rate by 25 basis points to 2.25%, responding to cooling U.S. inflation from August 2025. This is the second cut in four months, and the Fed signals it will continue its dovish approach into 2026, making the U.S. dollar less appealing to global investors. In contrast, the ECB held its main rate steady at 3.00% in early September 2025, and we expect it to remain there for a while. Eurozone inflation data backs this up, with the latest August 2025 estimate at 2.1%, just above the central bank’s target. This policy stability is attracting investment, as shown by Q2 2025 data with over €150 billion flowing into European investment funds.

Advice for Derivative Traders

For derivative traders, this outlook suggests they should position for steady appreciation of the euro in the coming weeks. Buying long-term EUR/USD call options with December 2025 or March 2026 expirations is a straightforward way to benefit from the expected rise to $1.24. This strategy allows traders to engage in the upswing while limiting risk. Currently, implied volatility in the EUR/USD pair is at an 18-month low, especially when compared to the more unstable periods of 2024. This means options are cheaper to buy right now, providing an attractive entry point for bullish positions before volatility potentially increases. A more cautious approach would involve bull call spreads. This strategy involves buying a call option at a lower strike price while selling another call at a higher strike price, helping to reduce the initial cost. It’s well-suited for a gradual increase, allowing traders to profit if the euro rises, but with limited potential gains. Create your live VT Markets account and start trading now.

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