US Dollar Recovery Momentum

The US dollar is gaining strength, affecting the EUR/USD exchange rate, which fell on Wednesday. Traders believe there may be limits to this decline due to expectations of a hawkish European Central Bank (ECB), especially with the upcoming US inflation report. These insights come from the FXStreet Insights Team, made up of journalists and analysts who provide expert market information. While they compile opinions from various sources, it’s crucial to verify all data independently before making any investment decisions. The EUR/USD dropped from the multi-month high of 1.1800 to around 1.1700. This movement is likely a temporary response to a slight decline in German business sentiment. We view this as a potential buying opportunity since the overall trend is still upward. The main factor driving this is the different monetary policies of the European Central Bank and the Federal Reserve. The Federal Reserve recently made its third consecutive rate cut on December 10, 2025, lowering the Fed Funds Rate to 4.50% as US inflation cooled to 2.8% in November. In contrast, the ECB has kept its deposit rate steady at 3.75% due to persistent inflation in the Eurozone at 3.0%. This difference in interest rates makes holding Euros more appealing than US Dollars.

Derivative Trading Environment

For those involved in derivative trading, the current market suggests that buying call options on the EUR/USD pair is a strong strategy. We recommend setting strike prices around the recent 1.1800 high, or even aiming for 1.1900 for options set to expire in late January 2026 to capture potential gains. To save on costs while still benefiting from a gradual rise, consider using bull call spreads. However, we should keep an eye on any signs of a slowdown in the Eurozone, indicated by the German IFO data. Buying cheaper, out-of-the-money put options with a strike near 1.1600 can provide a safety net against unexpected negative news. This approach can protect long positions from sudden downturns without sacrificing much upside potential. Meanwhile, the weakness in the British Pound presents another opportunity. Following a soft UK inflation report showing a 3.2% annual rate, the Bank of England is likely to ease policy. We expect the EUR/GBP cross to keep rising, having already increased over 2% in the last quarter, and we anticipate this trend will continue. Create your live VT Markets account and start trading now.

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