EUR/USD has dipped slightly as the USD improves during the Asian session. The currency pair is trading around 1.1730, down less than 0.10% today. Despite this drop, it’s still near the highest point since early October, reached last Thursday. The US Dollar is bouncing back from a two-month low, which affects the EUR/USD pair. However, this uptick in the USD lacks strong support and is limited by cautious expectations for the Federal Reserve. After three interest rate cuts this year, the Fed has shown a careful approach. Market players now expect two more cuts next year due to a slowing labor market.

Speculation on Fed Leadership

President Trump is considering candidates to replace Jerome Powell as Fed Chair, which could lead to further interest rate cuts. This speculation is keeping aggressive USD buying in check and providing some support for EUR/USD. At the same time, the Euro benefits from the belief that the ECB has stopped its rate cuts. Traders are being cautious ahead of this week’s important ECB meeting and the US Nonfarm Payrolls report. The US Dollar is moving in various directions against major currencies, with its strongest performance against the Australian Dollar, as indicated by percentage tables and heat maps showing its changes against other currencies. Looking back at previous analysis when EUR/USD was near 1.1730, we see a stark contrast to its current level around 1.0950. The key issue then, as now, is the policy differences between the Federal Reserve and the European Central Bank. Right now, the Fed is keeping a tight policy, while signs of economic weakness in the Eurozone are increasing. The focus on potential Fed rate cuts mirrors our current situation, but the context is different after years of battling inflation. The Fed funds rate remains above 4.5%, and futures markets are predicting about a 60% chance of a rate cut by the second quarter of 2026. The disappointing November jobs report, with a gain of only 160,000 jobs, adds to this speculation.

Opportunities in the Derivatives Market

Historically, the ECB was thought to be done with rate cuts, but now the scenario has changed. After a tightening period, recent Eurozone manufacturing PMI figures have been below 50 for several months, indicating a contraction. This weak data hints that the ECB may have to consider easing policy sooner than the Fed, which could weaken the euro. For traders, this difference creates opportunities in the derivatives market, especially with lower currency volatility. Implied volatility on EUR/USD options has dropped to multi-month lows, making strategies like buying straddles or simple puts cheaper before key data releases. This allows positioning for a potential decline in the pair if the ECB hints at a more dovish approach. Attention is now on the upcoming US CPI data and the central bank meetings in early 2026. Any surprising inflation data could significantly affect the timeline for expected rate cuts and bring volatility back into the market. Thus, we need to stay alert to the downside risks in EUR/USD, even if they seem limited for now. Create your live VT Markets account and start trading now.

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