Factors Behind USD Stabilisation

Several factors contribute to lower EUR/USD levels, but the risks are not equally spread. If the Fed remains independent, tariff issues are resolved, and the US avoids a shutdown, the USD could stabilise soon. However, if US trade policy continues to create challenges this year and the Fed considers cutting rates, it could greatly impact EUR/USD. This less likely scenario might have significant consequences for EUR/USD levels. After comments from a Fed governor about monetary policy, the US dollar has strengthened against the Euro. Last week, the EUR/USD pair nearly reached 1.08, but it is now below 1.07. For now, it seems the easiest direction is a stronger US dollar. At first, this may seem to contradict our expectation for a weaker dollar later next year, but lower levels can still occur in the short term. The US economy is slowing, showing a 1.5% annual growth rate for the third quarter of 2025, yet it continues to perform better than Europe, where recent manufacturing PMI data still indicates contraction at 47.8. As long as US inflation stays above 3%, the market will likely expect the Federal Reserve to keep interest rates steady.

Advice for Traders

There are many reasons for a lower EUR/USD, but we should remember that risks are unevenly distributed. A sharper-than-expected slowdown in the US isn’t the most likely outcome, but it could have a big impact. Traders might want to sell out-of-the-money EUR/USD call options to earn premiums while preparing for the dollar to remain stable. If upcoming US job and retail sales reports disappoint, the narrative could change quickly towards aggressive Fed rate cuts. We’ve seen how fast the dollar weakened during the banking issues in early 2023 when markets suddenly expected a policy shift. Just because this risk seems inactive doesn’t mean it’s gone. Derivative traders should use strategies that account for this uncertainty. While short-term positions may favor the dollar, buying volatility with a EUR/USD straddle could be wise. This would allow a trader to benefit from a significant price move in either direction, protecting against sudden changes in the economic outlook. Create your live VT Markets account and start trading now.

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