The EUR/USD stabilized after hitting a two-week low, as the European Central Bank (ECB) decided to keep interest rates unchanged. The ECB emphasized a careful, data-driven approach, indicating that future policy adjustments will depend on new data and that there are no firm commitments for future rate changes. The ECB maintained its rates, with the Deposit Facility at 2.00%, the Main Refinancing Rate at 2.15%, and the Marginal Lending Rate at 2.40%. The Eurozone economy continues to grow, supported by a strong job market, although geopolitical tensions present risks.

Traders Await Insights

The ECB’s statement did not provide a clear long-term rate path, keeping attention on future inflation and economic data. Traders are looking for more insights from ECB President Christine Lagarde. In the meantime, the US Dollar is benefiting from the Federal Reserve’s recent rate cut of 25 basis points. Fed Chair Jerome Powell did not provide guarantees of more cuts, which helped strengthen the USD. The US Dollar Index remained at 99.55, its highest level since August 1, due to positive developments in US-China trade relations. The USD showed notable gains against the Japanese Yen, while its performance varied against other major currencies. A currency heat map shows percentage changes among major currencies, highlighting the USD’s relative strength across different pairs.

Cautious Economic Approach

The EUR/USD is hovering around 1.0850 after the ECB confirmed it will keep its deposit rate at 3.00%. The bank is maintaining its usual data-dependent approach, offering no clear direction for 2026. This uncertainty keeps short-term traders on their toes. Policymakers are right to be cautious. Recent estimates showed Eurozone inflation stuck at 2.4% and Q3 growth at a sluggish 0.1%. Reflecting on the aggressive rate hikes from 2022-2023, it’s evident that their effects are weighing on the economy. This situation suggests that selling rallies in the Euro might be the preferred strategy for now. The key story here is the growing divergence between the ECB and the Federal Reserve, which appears to be setting the stage for a possible rate cut in early 2026. Recent US data, like core PCE inflation dropping to 2.2% and monthly job gains averaging just 110,000, supports this dovish outlook, contrasting sharply with the ECB’s steady stance. This disconnect in policy suggests that currency volatility could increase in the coming weeks. One-month implied volatility for EUR/USD has risen to 7.5%, up from a low of 5.8% over the summer. Buying options, like straddles or strangles, could be a smart way to prepare for significant price movements. Given the Fed’s softer tone, the most likely direction for EUR/USD seems to be upward. We might consider buying bullish call spreads to aim for a move toward the 1.1000 level while managing our risk. This strategy allows us to take advantage of a potential dollar decline as we approach the end-of-year meetings. Create your live VT Markets account and start trading now.

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