EUR/USD held steady at 1.1645 despite rising geopolitical tensions in the Middle East and little new information from the Eurozone. Recent US economic reports, like the Producer Price Index (PPI) and Retail Sales, have influenced predictions about a possible rate cut by the Federal Reserve in January. Even with strong economic data from the US, the US Dollar Index fell by 0.14% to 99.05. The PPI for November increased to 3%, beating expectations, while Retail Sales rose by 0.6% month-on-month, above the anticipated 0.4%.

Federal Reserve Stance

Federal Reserve officials continue to express concerns about inflation remaining above target levels. The Atlanta GDP Now model has increased its Q4 2025 GDP estimate from 5.1% to 5.3%. The economic calendar for the Eurozone is light, while the US has a busy agenda ahead. Key upcoming events include Eurozone inflation data and US Jobless Claims, along with regional Federal Reserve surveys. EUR/USD is currently showing bearish momentum, with the Relative Strength Index below neutral levels. If it breaks above 1.1700, it may test higher levels, but a drop below 1.1600 could lead to further declines. Recently, the Euro has shown strength against the Japanese Yen. The EUR/USD remains in a tight range as we evaluate the strong US economic data from late last year. The high producer price index and robust retail sales from November 2025 have led to reconsideration of how quickly the Federal Reserve might cut rates. This strength in the dollar is currently limiting significant upward movement.

Inflation and Interest Rates

The official December 2025 inflation numbers confirm ongoing price pressures. The US Consumer Price Index (CPI) recorded 3.4%, reinforcing earlier PPI data and making a January rate cut from the Federal Reserve unlikely. Eurozone inflation also remains high at 2.9%, indicating that the European Central Bank may need to maintain its strict stance. For derivative traders, this situation offers a chance to profit from the current indecision. With EUR/USD stuck between support at the 200-day average near 1.1579 and resistance around 1.1716, selling option volatility through strategies like iron condors could be effective. This tactic allows traders to collect premiums as long as the market stays within this range in the upcoming weeks. However, geopolitical events and forthcoming data releases could trigger a breakout. Market volatility is currently low, similar to levels in early 2024, making options more affordable. A long strangle, which involves buying both a call and a put option, would place a trader to benefit from a significant price shift in either direction. Given the risk-averse attitude stemming from tensions in the Middle East, it is wise to hedge against a sudden downturn. A sharp increase in tensions could drive investors toward the safety of the US dollar, breaking key support levels. Buying out-of-the-money puts on the EUR/USD is a cost-effective way to protect portfolios against such a move. Create your live VT Markets account and start trading now.

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