The US Dollar’s steep drop in early 2025 might encourage investors to diversify their portfolios. However, geopolitical issues and uncertainties with the Federal Reserve could keep the USD unstable. Experts predict substantial changes in the EUR/USD exchange rate in 2026, adjusting the 12-month target to 1.18, which reflects a slightly positive outlook. Factors like trade tensions, geopolitical events, the Fed’s autonomy, and risks related to US growth and inflation are likely to impact the USD’s value.

Expectations for EUR/USD

Changes in these areas could alter market sentiment. The EUR/USD pair is expected to see wide and volatile trading ranges, with a slight upward trend. The 12-month forecast for EUR/USD has shifted from 1.20 to 1.18. This adjustment considers the likelihood of a dovish stance from the Federal Open Market Committee and the possibility of the European Central Bank (ECB) raising rates by the end of next year. The forecast for 1 to 3 months stays at 1.16. After the US Dollar dropped sharply in the first half of 2025, we anticipate that the EUR/USD will have wide and choppy trading ranges. This indicates a potential market shift towards diversified portfolios as we move into 2026. Traders should brace for significant volatility due to geopolitical factors and changing expectations from central banks. Recent data shows US inflation for November 2025 at a slightly lower than expected 2.8%. This supports the view that the Federal Reserve might lean towards a more dovish approach, posing challenges for the dollar. This aligns with our 1 to 3 month EUR/USD forecast of 1.16, potentially serving as a support level.

The Ongoing Inflation Divergence

Meanwhile, inflation in the Eurozone remains high, currently around 3.5%, well above the ECB’s target. This situation has sparked speculation that the ECB might be preparing for its first rate hike late next year. This divergence between a dovish Fed and a possibly hawkish ECB supports our cautiously optimistic view for the currency pair. For traders in derivatives, this market environment suggests that buying volatility could be a smart strategy. With expectations of significant price movements but no clear direction, purchasing options to manage risk appears wise. Bullish call spreads could help target a rise towards our 12-month forecast of 1.18, allowing for potential gains while limiting risk. Currency volatility indexes back up this outlook, as the Cboe EuroCurrency Volatility Index (EVZ) has been high for months, significantly above the calmer levels seen in much of 2024. Consequently, strategies like straddles or strangles, which benefit from sharp price changes in either direction, become particularly relevant. These strategies could leverage the uncertainty surrounding US trade negotiations and concerns about the Fed’s independence. Create your live VT Markets account and start trading now.

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