The Euro is getting stronger against the US Dollar as new US inflation data lowers expectations for the Dollar. The overall Consumer Price Index (CPI) rose by 0.3% month-over-month, which is less than the 0.4% that was predicted. Core inflation also decreased to 3.0% year-over-year. Markets are nearly certain (99% chance) that the Federal Reserve (Fed) will cut rates again at their meeting in October, and additional cuts are expected in December. Currently, EUR/USD is trading around 1.1635, showing gains for the third day in a row due to the dollar’s general weakness. The US Bureau of Labor Statistics reported that CPI increased by 0.3% in September, which was below expectations and down from August’s 0.4%. Annually, inflation rose by 3.0%, also slightly under the forecast.

Core Inflation and Fed Expectations

Core CPI, which excludes food and energy, gained 0.2% month-over-month, falling short of the 0.3% forecast. Yearly core inflation stood at 3.0%, down from the expected 3.1%. This report heightened expectations for the Fed to continue easing as the labor market softens. The FedWatch tool indicates a 98.9% chance of a 25-basis-point rate cut in October, with another expected in December. Following the report, the US Dollar Index dropped below 99.00, and Treasury yields fell as confidence grew that the Fed is nearing the end of its tightening phase. Upcoming data, such as the S&P Global PMI and the University of Michigan Consumer Sentiment Index, will provide more insights into the health of the US economy and the Fed’s policy direction. The S&P Global Composite PMI reflects private business activity, which impacts GDP, industrial production, employment, and inflation expectations. A PMI score above 50 signals economic growth, while below 50 indicates a decline. With the Fed likely to cut rates next week, we can expect the US Dollar to weaken further against the Euro in the coming weeks. The September inflation report confirms a cooling trend we’ve been monitoring and strengthens the case for monetary easing. This atmosphere makes holding long Euro positions particularly appealing.

Strategic Positioning in Forex Market

The S&P Global PMI data released today showed a figure of 53.2, which is below expectations and down from last month’s 53.9. This supports the idea of a slowing US economy, putting pressure on the Fed to take action. Weakening data are clear indicators that the dollar’s strength is fading. We should consider buying at-the-money EUR/USD call options set to expire in November or December 2025. This strategy would allow us to take advantage of the anticipated rise in the currency pair while limiting our maximum risk to the premium paid. With the Fed’s meeting on October 30th approaching, the trend for EUR/USD looks to be upward. This shift from the Fed stands in contrast to the European Central Bank (ECB), which kept rates steady last month due to persistent core inflation near 3.5%. This difference in policy—where the Fed is easing while the ECB holds steady—creates a strong supportive environment for the Euro. Historically, such divergences have led to prolonged trends in currency pairs. Reflecting on past events, this situation reminds us of the Fed’s policy change in 2019, which resulted in a significant period of dollar weakness. Current data suggests that the dollar’s yield advantage may narrow considerably. We should plan for a potential rise to the 1.1800 level in EUR/USD by year-end. Given that implied volatility is high ahead of the Fed meeting, employing bull call spreads could be a smart strategy. This involves buying a call option and selling a higher-strike call to offset some of the expense. This approach lowers the upfront cash needed and can enhance the chances of a profitable trade, though with a capped upside. Create your live VT Markets account and start trading now.

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