EUR/USD declined as the US Dollar gained strength following Kevin Warsh’s nomination as Fed Chair. In December, US producer-side inflation held steady at 3.0% year-over-year, which is above the Fed’s 2% target. This reinforces a careful approach to policy. The Eurozone economy grew by 0.3% in Q4 2025, matching the previous quarter, and Germany’s GDP also increased by 0.3%. The US Dollar benefited further from a deal in the US Senate on a government funding package that improved market confidence.

Core Producer Price Index Rises

The Core Producer Price Index (PPI) in the US increased to 3.3% year-over-year, exceeding predictions of a drop to 2.9%. Fed officials view the current policy rate of 3.50%–3.75% as largely neutral and stress the need for patience with monetary policy. In currency movements, the Euro showed notable strength against the Japanese Yen. The currency heat map illustrates percentage changes among major currencies, highlighting the Euro’s relative strength. In December, Eurozone GDP grew by 1.4% year-over-year, surpassing forecasts. Germany’s annual GDP growth also increased to 0.4%, beating market predictions. The relationship between the Euro and the USD remains sensitive to US monetary policy changes. With the Federal Reserve’s strong policy stance, the EUR/USD outlook appears to be downward. Kevin Warsh’s appointment as Fed Chair indicates a firm approach, which has supported the dollar into January. Ongoing US inflation figures from late 2025 make near-term rate cuts less likely, bolstering the dollar’s strength.

Trading Strategy for EUR/USD

In the coming weeks, traders might consider buying put options on EUR/USD with strike prices below the 1.1800 level. This strategy allows for potential profits from expected weakness while limiting losses. The 1.1850 level has shown to be a significant resistance point, making it essential to monitor for failed attempts to rise above this level. The dollar’s positive trend was further confirmed when the January 2026 Non-Farm Payrolls report revealed 215,000 new jobs, well above expectations. Average hourly earnings also rose, showing that the tight labor market continues to drive price pressures reflected in last year’s PPI data. This gives Fed officials, like Musalem and Bostic, more reason to remain cautious before easing any policies. In contrast, January 2026 flash PMI figures from the Eurozone indicated a slight decline in the services sector, falling to 51.2 from 52.5. Although Germany’s Q4 2025 rebound was encouraging, this new data suggests that European growth may lag behind the US. This economic divide is a strong factor contributing to a lower EUR/USD exchange rate. We’ve observed this situation before, where differing monetary policies create lasting currency trends. The last notable divergence occurred during the 2014-2015 period when a hawkish Fed contrasted with a cautious European Central Bank, leading to a prolonged decline in the EUR/USD pair. This historical pattern suggests that the current trend may gain significant momentum. While the overall forecast for EUR/USD is bearish, it’s important to note the Euro’s strength against other currencies, especially the Japanese Yen. Given the performance we observed on Monday, establishing a long EUR/JPY position could serve as a beneficial hedge. This strategy would take advantage of the Yen’s weakness while reducing direct exposure to the US dollar’s strength. Create your live VT Markets account and start trading now.

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