EUR/USD recovered after disappointing US ISM Manufacturing PMI data weighed on the US Dollar. The Euro traded around 1.1706, bouncing back from a low of about 1.1659. The ISM Manufacturing PMI for December was 47.9, below the expected 48.3 and down from November’s 48.2. Although the Employment Index climbed slightly from 44 in November to 44.9 in December, it still indicates contraction.

US Dollar Weakens After Poor PMI Report

Initially, the US Dollar strengthened due to safe-haven demand after a US military operation in Venezuela. However, it dropped following the weak PMI data, with the US Dollar Index around 98.30. There is a noticeable policy divergence between the Fed, which may ease policies, and the ECB, expected to keep rates steady amidst stable growth. Eyes are now on key US and Eurozone data set to be released soon, including the US Nonfarm Payrolls report on Friday. The US Dollar is vital in global finance, making up over 88% of all foreign exchange trades. The Federal Reserve affects its value through monetary policies, adjusting interest rates and using quantitative easing or tightening when needed. We view the weak ISM data as a clear indicator of ongoing manufacturing struggles. This reading supports market predictions for two Federal Reserve rate cuts this year. The immediate rise in EUR/USD above 1.1700 is a direct reaction to this sentiment shift.

Policy Differences and Economic Outlook

The differing policies between the Fed and the European Central Bank are very significant, a trend we’ve seen develop during the tumult of 2025. While the US shows signs of weakening economic data, the Eurozone appears more resilient. This key difference should continue to favor the Euro over the US Dollar in the medium term. The recent ISM reading of 47.9 indicates 15 months of contraction in manufacturing activity over the last 16 months. On the other hand, recent Eurostat data revealed that inflation in the Euro area holds steady at 2.2%, supporting the ECB’s decision to maintain its current policies. The economic gap between the two regions is becoming more evident. With the high-impact Nonfarm Payrolls report due on Friday, we should think about buying short-dated EUR/USD call options. A strike price of around 1.1750 or 1.1800, expiring next week, might allow us to benefit from a weaker jobs report. This approach helps limit our downside risk if the number surprises positively. The situation in Venezuela may cause short-term volatility, but we believe that underlying economic data will have a stronger influence. A surprisingly strong jobs report poses the main risk to a long Euro position. Therefore, we should keep our position sizes small ahead of Friday’s release. We are also monitoring the US Dollar Index for a fall below 98.00, which would signal a broader downward trend for the dollar. Additionally, gold’s recent rise to over $4,400 an ounce supports the view of dollar weakness. These market signals reinforce our expectation of a higher EUR/USD exchange rate. Create your live VT Markets account and start trading now.

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