EUR/USD moved down to 1.1590 on Friday during Asian hours after recent gains. This drop happened as the US Dollar held onto its strength despite earlier losses. There is speculation about a potential Federal Reserve rate cut in December, with an 87% chance of a 25 basis points cut, up from 39% just a week ago. Markets are also anticipating three more cuts by 2026. The speculation grew with Kevin Hassett, the National Economic Council Director, seen as a top candidate for Fed chair. Traders believe he favors lower rates. Meanwhile, the ECB Minutes reveal that European policymakers prefer to keep rates steady due to uncertainties. With growth holding up and inflation close to target, further easing may not be necessary. This suggests that the cycle of rate cuts might be coming to an end.

The Eurozone Economic Outlook

The Euro, used by 20 European Union countries, is the second most traded currency globally. The ECB, based in Frankfurt, manages monetary policy to keep prices stable. Factors like inflation data and economic indicators, such as GDP, affect the Euro’s strength. A positive trade balance, which means more exports than imports, also strengthens the currency. The outlook for EUR/USD is influenced by the different strategies of the Federal Reserve and the European Central Bank as we approach December 2025. The US Dollar faces challenges as more traders bet on a Fed rate cut early next year. This difference in policies could benefit the EUR/USD pair. Current market data shows this trend, with the CME FedWatch Tool indicating a 75% chance of a 25-basis-point rate cut by March 2026. This view has gained traction since reports revealed that U.S. Q3 GDP growth slowed to 1.5%, indicating a cooling economy. These factors pressurize the Fed to think about easing its monetary policy.

Central Bank Policy Divergence

In Europe, the European Central Bank seems to be in a holding pattern, which could support the Euro. The latest Harmonized Index of Consumer Prices for the Eurozone was 2.8% in October 2025, remaining above the ECB’s target. This steady, but slowing, inflation makes it less likely that the ECB will consider rate cuts anytime soon. For derivative traders, this situation suggests that buying EUR/USD call options could be a smart way to take advantage of potential gains and limit downside risk. The expectation of a clear move based on differing central bank policies may also lead to increased implied volatility. Acting on this view in the upcoming weeks could be advantageous. Looking back to the 2018-2019 period, we see a historical parallel when a dovish Fed pivot resulted in a weaker dollar. The Fed typically starts easing before other major central banks, benefiting opposing currencies. This historical pattern suggests that the dollar may underperform in the near future. Traders confident about the upward trend for EUR/USD might explore long positions in futures contracts. This strategy offers direct exposure to fluctuations in the currency pair. On the other hand, those wanting to manage currency risk can use forward contracts to secure what may become a favorable exchange rate. Create your live VT Markets account and start trading now.

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