EUR/USD started the week strong, thanks to broad selling of the USD. The expectation of another Federal Reserve rate cut in December has weighed on the USD, helping the euro gain ground. Currently, the pair is trading above 1.1600 and testing the 200-day simple moving average (SMA). If it breaks above this level, it could lead to further gains. A few factors are dragging down the USD. The Federal Reserve’s cautious approach has contributed to this decline. The USD Index fell to a two-week low, with many forecasting a rate cut in December. In contrast, the European Central Bank (ECB) maintains a more aggressive stance, which is lifting the euro. The recent ECB meeting stated that interest rates would remain steady until 2026, adding support to the EUR/USD pair.

Euro Gains From Rate Outlook

The euro is benefiting from decreasing expectations of more cuts from the ECB. This helps push the EUR/USD pair higher. A confirmed break above the 200-day SMA will continue to bolster this positive outlook. Upcoming US economic data may also influence the EUR/USD movement. Traders are looking forward to the ISM Manufacturing PMI and Eurozone PMIs for hints about market trends. Over the last week, the USD showed mixed performance against major currencies. It was strongest against the Japanese Yen but struggled against the New Zealand Dollar. The chart below compares the percentage changes in currency values. The EUR/USD is at its 200-day moving average, around 1.1600, which is an important technical level. This strength comes largely from weakness in the USD, as many believe the Federal Reserve will lower interest rates soon. This contrasts with the European Central Bank’s firm stance, creating a clear trading opportunity. Recently, the November US jobs report was weaker than expected at 155,000, and the core PCE inflation dropped to 2.8%. These numbers strengthen the case for the Fed adopting a more dovish stance in December, making it difficult to support the USD against its peers.

Eurozone Strength Supports the Euro

On the other hand, recent Eurozone data has shown more stability. November’s flash HICP inflation remained steady at 2.6%, which was better than expected. Also, Germany’s industrial production saw a small increase last month, suggesting the Eurozone economy is stabilizing. This supports the belief that the ECB will keep its policy tight for longer, which lends additional strength to the euro. For traders, this signals a potential move higher in EUR/USD. We’re considering buying call options that expire in January or February 2026 to benefit from a significant break above the 200-day average. A more cautious strategy could be to use a bull call spread, lowering the entry costs while managing risk. This situation reminds us of the market dynamics in mid-2019, when the Fed began to ease rates while the ECB held steady, leading to a prolonged decline of the dollar. This historical pattern is a helpful guide for how things might unfold if the Fed goes ahead with the expected rate cut. Create your live VT Markets account and start trading now.

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