The EUR/USD pair has bounced back as the European Central Bank (ECB) decided to keep interest rates steady, which was expected. At the same time, slowing inflation in the US has put pressure on the US Dollar, providing a boost for the Euro. The ECB has kept borrowing costs unchanged for the fourth meeting in a row. They are holding rates at 2.00%, 2.15%, and 2.40% for the Deposit Facility, Main Refinancing Operations, and Marginal Lending Facility, respectively. The Bank stated that it will continue to base decisions on data, targeting an inflation rate of 2%.

Inflation Projections

Future decisions will take into account economic data, pricing trends, and how effective their policies are, without committing to a specific rate path. The ECB expects inflation to meet the 2% target by 2028, with a higher outlook for 2026 due to slower declines in service inflation. The Eurozone growth forecast has improved since September. This outlook predicts growth of 1.4% in 2025, 1.2% in 2026, and 1.4% for both 2027 and 2028. The US Dollar has weakened after US inflation reports came in lower than expected, leading to speculation about potential easing by the Federal Reserve. In November, the US Consumer Price Index rose by 2.7%, while a 3.1% increase was expected. Although inflation numbers were lower, the US Initial Jobless Claims at 224K slightly supported the dollar, as this was better than the expected 225K and lower than the prior 237K figure. With the ECB keeping rates steady and US inflation for November surprisingly low at 2.7%, the EUR/USD is likely to rise. This difference in economic data strengthens the expectation of a weaker dollar against the euro as we approach the new year. Traders should consider the current level of 1.1756 as a possible point for further gains.

Market Implications

This outlook is supported by market predictions regarding future actions by central banks. The CME FedWatch Tool shows that the chance of a Federal Reserve rate cut in the first quarter of 2026 has risen to over 70%. This marks a significant increase following the latest CPI report. On the other hand, the ECB forecasts Eurozone inflation at 2.1% for 2025, indicating they are not rushing to ease policy, which creates a clear gap in policies. For those trading derivatives, this situation favors buying call options on the EUR/USD with January or February 2026 expiration dates to take advantage of expected upward movement. The unexpected US inflation data has likely caused a surge in short-term implied volatility, so waiting for a slight dip could present a better entry opportunity. A bull call spread is another strategy to reduce initial costs while still benefiting from a rise in the pair. Historically, similar periods of differing policies have led to sustained trends in currency values, like in 2018 when the Fed’s dovish shift weakened the dollar over the following months. The current improved growth outlook for the Eurozone, now at 1.4% for 2025, provides a supportive backdrop for the euro that was lacking in previous cycles. This indicates that the foundation for a stronger euro is stronger this time. Looking ahead, we should closely monitor comments from ECB President Lagarde for any signs of dovishness that could slow down this rally. The upcoming US Personal Consumption Expenditures (PCE) Price Index will also be crucial, as it is the Fed’s favored measure of inflation. Any changes from the soft CPI data could quickly shift sentiment and reverse these bullish positions. Create your live VT Markets account and start trading now.

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