**EUR/USD Rally** The EUR/USD is rising, trading above 1.1750 thanks to strong industrial production data from the Eurozone. This analysis comes just before the release of US manufacturing data and speeches from Federal Reserve officials later. Eurostat reported that factory output growth hit 0.8% in November, up from 0.2% in October, exceeding expectations. On a year-on-year basis, this marks a 2% increase, showing improved manufacturing performance in the region. The EUR/USD has risen nearly 2% over the past three weeks as the market anticipates potential rate cuts by the US Federal Reserve. Speculation about Jerome Powell being replaced as Chair with a more dovish candidate is also limiting the dollar’s gains. Traders remain cautious, waiting for the US Nonfarm Payrolls and Consumer Price Index data due this week, coinciding with the ECB’s monetary policy decision. In China, industrial production slowed in November, while retail spending dropped to its lowest level in nearly two years. Concerns are resurfacing about the property sector, especially regarding state-backed developer China Vanke’s financial struggles. The NY Empire State Manufacturing Index is expected to fall to 10.6 in December from 18.7. Fed officials will discuss monetary policy, which could provide further direction for the markets. **Outlook for the Euro** The recent rise in EUR/USD above 1.1750 is mainly due to unexpectedly strong industrial output from the Eurozone, which grew 0.8% in November against lower expectations. This strong performance in Europe contrasts sharply with the outlook for the US dollar, which is being affected by expectations of future Federal Reserve rate cuts. We are now consolidating these gains as we approach a busy week. At the heart of this trade is the growing policy gap between the European Central Bank (ECB) and the Federal Reserve (Fed). The ECB’s main rate remains steady, with officials suggesting a hike might be next. Meanwhile, the Fed faces pressure to ease policy by 2026. This fundamental divergence has pushed the pair up nearly 2% over the last three weeks and continues to be the main theme. This week’s focus is on US data, which will either support or challenge the market’s dovish Fed narrative. We are particularly watching Tuesday’s delayed Nonfarm Payrolls report, due to a recent government data issue, and Thursday’s Consumer Price Index. After inflation remained around 3% for much of 2025, any sign of cooling would reinforce expectations for a Fed rate cut, likely pushing EUR/USD higher. With major events from both US data and the ECB meeting on Thursday, we expect increased short-term volatility. This is a good time to consider options strategies, as implied volatility is likely to rise before these announcements. Buying straddles or strangles on EUR/USD could be a way to profit from significant price movements in either direction, no matter the data outcome. Despite the upward trend, technical indicators suggest the rally may be overextended, with the MACD on the 4-hour chart indicating a possible pullback. Thus, hedging long positions seems wise. We might consider buying out-of-the-money puts with a strike price below the immediate support level around 1.1720 to protect against unexpectedly strong US data. We’ve seen similar situations before, such as in the mid-2010s. Back then, the policy divergence between an easing ECB and a tightening Fed led to a strong, multi-year trend in favor of the US dollar. The current conditions suggest the potential for a similarly powerful, sustained move, this time favoring the euro. Create your live VT Markets account and start trading now.

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