EUR/USD rose above 1.1740, increasing by over 0.50% as the dollar weakened despite positive US economic news. This rise was driven by better risk sentiment following US President Trump’s decision to drop tariff threats on Europe, which boosted the euro. At the time of reporting, EUR/USD was at 1.1743, recovering from a daily low of 1.1670. Strong Economic Indicators The strong GDP numbers from Q3 and stable inflation in the US lowered expectations for a Federal Reserve rate cut in January. Market predictions showed a 95% chance that the Fed will keep rates steady, along with reduced predictions for future cuts. In Europe, minutes from the ECB meeting indicated a shared view that underlying inflation remains close to the 2% target. The EU’s economic calendar will include Flash PMIs for Germany, France, and the overall bloc, plus comments from ECB President Christine Lagarde. In the US, attention will be on the S&P Global Flash PMIs and consumer sentiment data. The euro has shown mixed changes against other major currencies this week, performing well against the Japanese Yen. The ECB, based in Frankfurt, manages monetary policy in the Eurozone, focusing on price stability through interest rate decisions. Important economic data, like GDP, inflation rates, and trade balances, are key to assessing the euro’s strength. Positive trade balances, where exports exceed imports, usually bolster the currency. Last year, when tariff threats were lifted, EUR/USD exceeded 1.1740. However, that optimism seems to have peaked, as the pair has significantly declined since then. Now, the focus has shifted from settling trade disputes to the growing differences in central bank policies. Changing Economic Outlook Looking back, markets correctly anticipated Fed rate cuts in 2025, but they underestimated the US economy’s strength. The US Core PCE data from December 2025 showed inflation at 2.9% year-over-year, weakening the case for more aggressive rate cuts. This stands in stark contrast to a year ago when markets expected over 40 basis points of easing. In Europe, the ECB’s earlier confidence has diminished. Recent Eurostat data revealed that Eurozone GDP growth was almost flat in the fourth quarter of 2025, and flash PMI figures for January suggest a weak beginning to the year. Consequently, money markets now believe there is a 70% chance of an ECB rate cut by June, adding pressure on the euro. This policy divergence signals potential increased volatility. The implied volatility in EUR/USD options remains moderate, creating opportunities to buy straddles or strangles for potential profits from significant price moves in either direction over the next month. The current environment is much uncertain compared to the risk-on attitude seen last year. For traders with specific views, the economic outlook leans toward a weaker euro against the dollar. It would be wise to consider buying put options or setting up bearish put spreads targeting a drop below 1.0800 in the weeks ahead. The previous technical targets of 1.1800 and higher no longer seem relevant given the current macroeconomic situation. Create your live VT Markets account and start trading now.

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