The EUR/USD rose to 1.1643 because tensions eased from US-China trade talks in Malaysia. These discussions framed a potential agreement on tariffs and rare earths, while traders believe there is a 97% chance that the Federal Reserve will cut rates by 25 basis points. On Monday, the currency pair increased by 0.15% as the US-China trade war de-escalated, ahead of a planned meeting between Trump and Xi Jinping. The US Dollar Index rose slightly to 98.94, limiting further gains for the EUR/USD. Traders are now waiting for the Federal Reserve to announce its monetary policy.

Eurozone Business Survey

The Eurozone’s IFO Business Survey shows that businesses expect some economic improvement, even though current conditions aren’t great. Traders are closely monitoring interest rate expectations and key resistance levels for EUR/USD at 1.1659 and 1.1686. The Euro showed mixed performance against major currencies, doing better against the Japanese Yen but varying against others. Economic data from the Eurozone, such as GDP and consumer sentiment, heavily influences the Euro’s value and the European Central Bank’s (ECB) interest rate decisions. Reflecting on the Trump era, it’s evident that risk sentiment around trade and central banks can swiftly impact the EUR/USD. While the pair traded above 1.16 back then in hopes of a trade truce, it now hovers around 1.0750 due to different pressures. The primary concern now is not trade tariffs but rather the contrasting monetary policies of the Fed and ECB.

Monetary Policy Divergence

The US Federal Reserve has kept its benchmark rate steady at 5.50% for several months following a series of rate hikes in 2023 that successfully reduced inflation. Markets expect the Fed to cut rates soon, with the CME FedWatch tool indicating a greater than 60% chance of a rate cut in the first quarter of 2026. This anticipation is limiting the strength of the US Dollar. In comparison, the European Central Bank is facing stubborn inflation, with the latest consumer price data showing core inflation at 2.7%, exceeding the 2% target. ECB officials remain hawkish, indicating that a policy easing is not yet on their agenda. This situation creates fundamental tension for derivative traders. With the uncertainty around when central banks will shift policy, volatility in the EUR/USD is likely to increase from its current low levels. We suggest buying at-the-money straddles or strangles with expirations within the next 30 to 60 days. This strategy allows traders to benefit from significant price movement in either direction, without needing to predict if the Fed or the ECB will change their policies first. For traders with a directional view, the current trend favors a rise in the EUR/USD, as the Fed is expected to reduce rates before the ECB. Buying call options or using bull call spreads with a target of 1.0900 is a low-cost way to capture potential upside. Key upcoming data on the US labor market and Eurozone inflation will be crucial, as any surprises could influence the timing of a breakout. Create your live VT Markets account and start trading now.

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