EUR/USD is trading carefully near a two-week low of 1.1570. The US Dollar is strong due to reduced expectations of further rate cuts by the Federal Reserve and improved trade relations between the US and China. The US Dollar Index is close to a three-month high at 99.70. This week, the dollar gained the most against the British Pound, rising by 1.31%.

Fed and ECB Monetary Policies

Fed Chairman Jerome Powell mentioned that future rate cuts in December are uncertain after a recent 25-basis point reduction. Meanwhile, the European Central Bank (ECB) kept its Deposit Facility rate steady at 2%, in line with their inflation goals. This Friday, the Eurozone’s preliminary Harmonized Index of Consumer Prices will be in focus. The EUR/USD pair looks bearish, staying below the 20-day EMA at 1.1630. If the Relative Strength Index drops below 40.00, we could see more bearish movement. A drop could push the pair down to 1.1547 and 1.1528, while if it rises above 1.1728, it might reach July’s high of 1.1830. Overall, the outlook for EUR/USD is bearish. The pair is struggling near 1.1570 due to a stronger US dollar. The Federal Reserve’s hint at not cutting interest rates again in December supports the dollar’s strength, making shorting the Euro seem attractive in the short term.

Recent Economic Indicators

Recently, the October non-farm payrolls report showed better-than-expected results, adding 290,000 jobs, with wage growth also rising. This strong economic data gives the Fed more reason to keep rates steady, boosting the dollar’s position and decreasing the chances of further monetary easing anticipated by traders. Given this bearish outlook, we recommend considering put options on the EUR/USD. This strategy will profit if the pair drops below key support levels like the 1.1547 low from October 30. Look for options expiring in the next few weeks to take advantage of this trend. On the Euro side, we’ll closely watch the upcoming Eurozone Harmonized Index of Consumer Prices (HICP). The consensus is for core inflation to slightly decrease to 2.5% year-over-year. A result at or below this would indicate managed price pressures. A lower inflation reading would give the ECB little reason to change its steady approach, keeping its deposit rate low at 2%. This difference between the Fed’s policies and the ECB’s inaction is likely to keep the Euro under pressure. The absence of strong signals from the ECB leaves the Euro vulnerable. This growing gap between Fed and ECB policies has been a trend throughout 2022 and 2023, historically favoring the dollar. A similar situation is developing now, as US economic strength contrasts with a more cautious view in Europe. Hence, we expect further downside movement for EUR/USD. Positioning for a decline towards August lows around 1.1528 seems wise. Options to define risk or shorting futures contracts are effective strategies for the upcoming weeks. Create your live VT Markets account and start trading now.

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