**ECB Stability Amid Uncertainty** In early 2025, the market was cautious as the EUR/USD exchange rate stood around 1.1650, waiting for the US jobs report. There were expectations for a weak gain of only 60,000 jobs in December 2024, alongside increasing jobless claims. This indicated a slowing US labor market, which influenced the Federal Reserve’s policy changes throughout 2025. That weak labor data indeed led the Fed to start cutting interest rates by mid-2025, resulting in a significant drop in the dollar. As a result, the EUR/USD steadily climbed throughout the year, surpassing the 1.2000 mark. However, the recent Nonfarm Payrolls report for December 2025 showed a surprising gain of 199,000 jobs, indicating that the US economy is stabilizing and the rapid decline of the dollar might be over. **ECB Policy and Eurozone Outlook** In contrast, the European Central Bank has been more cautious, implementing just a small rate cut to 1.75% in the third quarter of 2025 to support slow growth. The Eurozone inflation, measured by HICP, has remained stable, with the latest reading for December 2025 at a manageable 2.1% year-over-year. This stability gives the ECB little reason to tighten policy, which limits further gains for the Euro. With the current EUR/USD spot rate at around 1.2230, the dynamics have shifted for the upcoming weeks. The recent strengthening in the US labor market suggests that the Federal Reserve may pause its rate cuts, which could limit the upward movement of the EUR/USD pair. We believe the rally from the 1.1650 level seen a year ago has matured and is now facing significant challenges. Therefore, traders should think about strategies to protect against or profit from a potential stall or reversal in EUR/USD. Selling out-of-the-money call options with strike prices around 1.2400 could be a good way to generate income, reflecting the belief that the pair may struggle to rise further. For those expecting a more substantial pullback, buying put options with a strike near 1.2100 provides a way to position for a downturn with defined risk. Create your live VT Markets account and start trading now.

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