The US dollar is decreasing as we approach Fed week, and the euro is getting stronger against it. The EUR/USD rate has moved from 1.1712 to 1.1737. Treasury yields have increased by 3-6 basis points; however, the dollar’s strength has lessened due to weaker UMich consumer sentiment data. **Expectations for Monetary Policy** Expectations for monetary policy are changing. The chance of a 50 basis point Fed rate cut is now just 4.8%. The lack of information about further rate cuts after the CPI report may be impacting market sentiment. Traders should stay alert for any Fed preview before the rate decision. The EUR/USD pair’s performance suggests bullish consolidation after rising from 1.03 to 1.17. The pattern of pullbacks followed by gains points to an upward trend, especially as the ECB pauses rate cuts. Meanwhile, the Fed is expected to maintain a prolonged rate-cutting period with an anticipated 125 basis point cut over the next year. Given these factors, breaching recent highs in EUR/USD could encourage traders to target a return to 1.20. This level serves as a psychological benchmark, reflecting general economic conditions and the outlook for monetary policy. As we near the Fed meeting, the US dollar shows signs of weakness, influenced by a cooling economy. The latest jobs report for August 2025 indicated only 150,000 new jobs, falling short of expectations, and the unemployment rate rose to 4.2%. Coupled with a decline in the University of Michigan consumer sentiment index to 65.5, the lowest in over a year, the dollar’s downward trend is reinforced. **Path for Monetary Easing** The market is now pricing in a less than 5% chance of a significant 50 basis point rate cut, but the path to easing is clear. The August 2025 CPI inflation data showed a mild 2.5%, giving the Federal Reserve plenty of reasons to start a cutting cycle. We should keep an eye out for the usual Fed preview, which typically appears on the Monday before the decision, for any final clues. On the other hand, the European economy is showing more strength, supporting the euro’s rise. The Eurozone GDP for the second quarter of 2025 showed 0.4% growth, while inflation stubbornly remains at 3.1%, allowing the European Central Bank to keep rates steady. This divergence in policy is a key factor in the euro’s rise from 1.03 to around 1.17. For derivative traders, this situation suggests they position themselves for further euro strength against the dollar. A simple strategy is to buy call options on the EUR/USD pair. This provides upside potential if the pair breaks recent highs while limiting risk to the premium paid. This allows traders to take advantage of the expected upward trend with a clear risk profile. The 1.20 target is an important psychological level with historical significance. Looking back to 2020-2021, this level served as a key area of support and resistance. A move towards this zone seems likely if the Fed confirms a dovish stance and the euro continues to gain economic ground. Create your live VT Markets account and start trading now.

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