The EUR/USD pair has fallen to its lowest level since December 2, after US labor market data came in better than expected. Weekly Jobless Claims decreased to 198,000, below the predicted 215,000, and there were positive trends in regional manufacturing reports. The Euro has weakened further against the US Dollar, now approaching the 1.1600 mark. The US Dollar Index (DXY) has risen to its highest level since December 3, fueled by job market data showing stability and ongoing inflation worries.

Fed Perspectives on Interest Rates

Fed official Austan Goolsbee commented on the job market’s stability and indicated that interest rates might be lowered this year, but only if inflation decreases. On the other hand, Raphael Bostic adopted a cautious view, suggesting that the Fed should keep policies tight due to high inflation levels. The Federal Reserve influences US monetary policy mainly through interest rate changes, which impact inflation and employment. It holds eight policy meetings each year and may use strategies like Quantitative Easing (QE) or Tightening (QT) to guide the economy’s credit supply and the US Dollar’s value. Generally, QE tends to weaken the dollar, while QT strengthens it by adjusting bond-buying. Looking back a year, a similar trend emerged when strong US labor data in early 2025 drove the Euro lower against the Dollar. The main takeaway then was the strength of the US job market, which prompted the Fed to maintain a strict policy. This trend of a strong US economy compared to others appears to be continuing into early 2026.

European Central Bank Actions

This trend was confirmed in the latter part of 2025, with US jobless claims consistently staying in the healthy range of 210,000 to 225,000. Notably, data from December 2025 showed US Core CPI inflation remained stubbornly high at 3.1%, well above the Fed’s target. This has strengthened the view that the Fed will tread carefully with rate cuts. In contrast, the European Central Bank has been dealing with slowing growth and cut its main interest rate twice in late 2025. This split in policy between a cautious Fed and a more active ECB has been a key factor in driving the EUR/USD pair lower. The difference in interest rates between the two regions has increased the appeal of holding dollars. Given these conditions, traders may want to consider positions that capitalize on ongoing US Dollar strength against the Euro. With EUR/USD currently around 1.0550, there is strong downward pressure. Options traders might look into buying puts or setting up bearish put spreads to take advantage of a possible move toward the 1.0400 level in the coming weeks. Expect volatility to rise around upcoming inflation and employment data, as these are the critical metrics that Fed officials monitor. Even a small weakening in US data could lead to a quick, short-term rally, but the overall trend is likely to remain downward as long as the policy divide with Europe continues. Therefore, strategies should be designed to profit from a continued downward trend while being alert to potential short-term spikes. Create your live VT Markets account and start trading now.

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