EUR/USD started the week a bit lower. It traded near 1.1860 in the Asian session on Monday and stayed under pressure around 1.1850. Trading was quiet because US markets were closed for Presidents’ Day, and Mainland China was shut for the week-long Lunar New Year holiday. Losses were limited as the US Dollar softened after weaker January inflation data. The data lifted expectations that the Federal Reserve could cut rates later in 2026. US CPI rose 2.4% year-on-year in January, down from 2.7% in December and below the 2.5% forecast. Monthly CPI came in at 0.2%, down from 0.3% previously and below the 0.3% expected.

Fed Policy Expectations

US labour data showed a solid jobs market. Nonfarm Payrolls rose by the most in over a year, and the Unemployment Rate fell unexpectedly. Markets expect the Fed to keep rates unchanged in March, then deliver two 25-basis-point cuts by the end of the year. The CME FedWatch tool showed nearly a 90% chance of no change in March, up from 81% a week earlier. Markets place the first cut in June at about a 52% probability. The euro found support after signs the ECB is not worried about recent euro strength. ECB President Christine Lagarde said the euro area inflation outlook is in a “good place” and warned against reacting to short-term or volatile data. Looking back at this time last year, the market was positioned for US Dollar weakness, with EUR/USD near 1.1850. In February 2025, expectations focused on a soft 2.4% inflation print. That view drove bets on two Fed rate cuts by the end of 2025. However, that outlook turned out to be too optimistic, as the US economy stayed stronger than expected. In the second half of 2025, inflation remained stickier than forecast. Core CPI averaged 2.9%, which limited the Fed’s ability to cut as much as the market had priced in. The Fed ultimately delivered only one 25-basis-point cut in November 2025. In contrast, the ECB started cutting in September. This policy gap helped push EUR/USD down toward 1.1200 by year-end.

Strategy And Volatility

The latest January 2026 data shows US CPI rising again to 3.1%. This surprised analysts and raised doubts about future Fed cuts. At the same time, the latest Eurozone Harmonised Index of Consumer Prices (HICP) fell to 2.2%. Several ECB officials are now openly discussing the need for more stimulus. This growing gap in data and central bank messaging is shaping the market mood. With this divergence, derivative traders should prepare for more downside pressure on EUR/USD in the coming weeks. We believe buying put options with a strike near 1.1000, or setting up bear put spreads, could be a sensible approach. These positions would benefit if EUR/USD moves lower as markets price in a more hawkish Fed and a more dovish ECB. We also see implied volatility on one-month EUR/USD options rising to 8.1%, up from 6.7% just two months ago. This suggests the market expects larger swings. Traders should keep in mind that, even if the direction looks clear, higher volatility makes options more expensive. That increases the need for careful position sizing. Create your live VT Markets account and start trading now.

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