The EUR/USD has reached a four-month high, driven by a weakening US Dollar. Factors contributing to this decline include political risks, trade tensions, and uncertainty around policies. The Euro has built on its gains, trading around 1.1886, its highest level since mid-September. Ongoing political challenges in the US, such as trade strategies and fears of interference in the Federal Reserve’s independence, are affecting the Dollar’s credibility.

Traders Move Away from the US Dollar

Traders are moving their investments from the US Dollar to other G10 currencies. A potential government shutdown looms as Senate Democrats oppose a significant funding bill. The US Dollar Index (DXY) is close to 96.97, reaching its lowest point in four months. The Dollar’s downtrend is worsened by the Yen’s recovery following a major “rate check” influenced by the Treasury. Recent US economic data has not helped the Dollar’s situation. In November, Durable Goods Orders rose by 5.3%, surpassing expectations, and non-defense capital goods orders also increased. Market attention is now focused on the Federal Reserve’s upcoming interest rate decision. Most expect rates to stay the same, looking for guidance from Fed Chair Jerome Powell.

Focus on Eurozone Data

Key Eurozone economic indicators will be released this week, including a preliminary GDP estimate on Friday. Last year, the US Dollar faced heavy pressure due to political worries and concerns about its international standing. This situation allowed the Euro to rise to multi-month highs as traders shifted their focus away from the Dollar—a trend that heavily influenced the market throughout 2025. However, the landscape is changing in January 2026, driven by an economic divergence. Recent flash PMI data shows US business activity growing at 51.5, while the Eurozone’s PMI is below 50 at 49.2, indicating a contraction. This suggests the US economy starts the year on a stronger note. This economic strength keeps the Federal Reserve cautious. With core inflation in the US staying steady at 2.8%, the Fed is hinting at a “higher for longer” interest rate policy. Meanwhile, weaker growth and inflation dropping to 2.2% in the Eurozone might compel the European Central Bank to consider rate cuts sooner. For derivative traders, this scenario suggests preparing for a potential EUR/USD reversal. Strategies like buying put options on the Euro or creating bearish call spreads could be effective in capitalizing on a renewed US Dollar strength. Such positions would profit if the Euro weakens against the Dollar in the coming weeks. We can expect rising implied volatility before the central bank meetings in February. This is a good opportunity for traders using strategies like straddles or strangles if they anticipate significant price movements but are uncertain about the direction. Timing these trades around major economic data releases will be crucial. Looking back to earlier cycles, such as in 2014 when the Fed took a hawkish stance compared to other central banks, we saw a multi-year rally for the US Dollar. The current macroeconomic environment is beginning to echo these historical trends. Create your live VT Markets account and start trading now.

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