EUR/USD increased in Asia as the costs for eurozone investors to hedge the dollar dropped from 2.40% to 1.85%, boosting demand for euros. Eurozone investors hold more than €2.3 trillion in U.S. debt, so even a slight increase in hedge ratios might lead to selling dollars, pushing the exchange rate towards the 1.1655–1.17 resistance area. Lower energy prices have improved the eurozone’s trade terms to their highest levels this year, positively affecting its external accounts. The costs for eurozone residents hedging against foreign exchange losses on U.S. assets fell to 1.85% annually, down from 2.40% in July. This decrease of 55 basis points is significant for bond investors looking for steady returns.

Focus on Ukraine Peace Talks

In Europe, the spotlight is on peace talks regarding Ukraine, with little progress in recent discussions between the U.S. and Russia. A major point of interest is the European Commission’s proposal to use frozen Russian assets to financially support Ukraine. If the exchange rate surpasses the 1.1655/70 area, particularly with weak U.S. economic data, EUR/USD could reach 1.17, with a year-end target set at 1.18. We continue to see the trend that started late in 2024 when hedge costs for eurozone investors sharply fell. This decline from 2.40% to 1.85% has quickened through 2025, with recent data showing 3-month hedging costs near 1.25% due to the Federal Reserve’s rate cuts in September and November. This ongoing reduction makes holding hedged U.S. assets more appealing, supporting the euro. The size of these holdings means even minor changes can significantly impact the currency market. Last year, eurozone investors held about €2.3 trillion in U.S. debt, and recent figures from the European Central Bank reveal this has risen to nearly €2.5 trillion. An ongoing increase in hedge ratios on this large portfolio will require consistent dollar selling, creating a strong demand for EUR/USD.

Focus on Eurozone

Fundamentally, the eurozone’s trade terms remain favorable, a trend we have noticed all year. Brent crude prices, which caused concerns in late 2024, have stabilized around $75 a barrel this quarter, easing pressure on the eurozone’s import costs. This has allowed the EUR/USD pair to move comfortably above the targeted 1.1800 level. Given this context, traders might want to consider positioning for further gains in EUR/USD. Buying call options with strike prices targeting 1.2100 for the first quarter of 2026 could be a wise strategy, as implied volatility has stayed low, making options more affordable for capturing the next upward movement. The differences in central bank policies are now the main driving force, with the Fed easing and the ECB remaining firm. The approval in mid-2025 of the plan to use frozen Russian assets for Ukraine adds stable support for the euro. In the following weeks, any U.S. data hinting at more Fed rate cuts will likely push the pair higher. Create your live VT Markets account and start trading now.

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