**Impact of Strained EU-US Relations** Recent Eurozone flash PMIs showed mixed results. Services are growing, while the Manufacturing PMI improved slightly but is still below 50, indicating contraction. In the US, economic data points to a steady interest rate outlook from the Federal Reserve. Q3 GDP was revised upward, and inflationary pressures were noted in November. The EUR/USD exchange rate is fluctuating within key Fibonacci retracement levels, showing mild positive momentum. Technical indicators suggest a bullish trend, with resistance around 1.1765 and targets set beyond that point. **Political Sentiment vs. Economic Fundamentals** Despite solid economic data, the US dollar has weakened, suggesting that political sentiment is driving the market more than actual fundamentals. The strength of the EUR/USD pair stems from the ongoing tensions in transatlantic relations. This trend is expected to continue, so traders should be cautious about betting on a dollar rebound solely based on economic reports. The geopolitical risk is increasing currency volatility, with the Cboe EuroCurrency Volatility Index (EVZ) reaching a 10-month high of 9.8 last week, compared to an average of 6.5 in late 2025. This high volatility indicates that options strategies aiming to benefit from significant price movements may be more effective than simple directional bets. The differences in central bank policies also support the euro’s strength. While the Fed is maintaining its stance, European Central Bank officials hinted at a more aggressive approach to inflation in December 2025, which the market interpreted as hawkish. This contrasts with the Fed’s current cautious approach, making the euro more attractive. We’ve seen similar patterns before, especially during the trade tariff disputes of 2024 when political news overshadowed economic data. During that time, the dollar remained weak even with stronger US growth compared to Europe. History suggests that until political issues with the EU are resolved, the dollar’s outlook is likely to be negative. In the upcoming weeks, buying EUR/USD call options could be valuable for capitalizing on potential gains while managing risk. High volatility makes strategies like a bull call spread helpful for reducing upfront costs. If the euro breaks through the key 1.1765 resistance level, this could lead to a quick move towards 1.1800. Today’s US PMI data release will be a significant test for the current market dynamics. If the data is stronger than expected, it might not boost the dollar if overall sentiment remains negative, reinforcing the dominant political theme. However, if the data is weak, it could greatly accelerate the EUR/USD rally by aligning with the current bearish sentiment on the dollar. Create your live VT Markets account and start trading now.

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