The EUR/USD pair has risen for the second consecutive day, now between 1.1830 and 1.1835, driven by selling of the US Dollar (USD). This increase follows Friday’s bounce from a two-week low of 1.1765. The change in prices is also affected by reduced worries over Middle East tensions after discussions between the US and Iran. Furthermore, differing interest rate paths between the Federal Reserve and the European Central Bank indicate more possible gains for the pair.

Interest Rate Divergence

Traders believe that the US Federal Reserve will lower rates by two rounds of 25 basis points each in 2026. This belief is supported by weak US labor market data. In contrast, the European Central Bank is not expected to make further rate cuts, as European growth remains stable. Traders are awaiting the delayed US Nonfarm Payrolls report this Wednesday, which could impact the dollar and the EUR/USD pair. Currently, economic conditions favor the euro, with no significant macro data from Europe or the US before the NFP report is released. Today, the USD shows mixed strength against other major currencies, gaining the most against the British Pound. The heat map below shows these currency percentage changes, with the base currency listed in the left column and the quote currency in the top row. The EUR/USD is approaching the 1.1835 resistance level, driven by a weaker US dollar. This upward trend started after last week’s bounce from the 1.1765 area. Attention is now on the delayed US jobs report set for Wednesday, which could significantly influence the currency pair. A clear difference in central bank policies supports a higher EUR/USD. The market has fully anticipated at least two Fed rate cuts for 2026, particularly after last month’s Core PCE inflation reached a two-year low of 2.1%. Meanwhile, the Eurozone’s flash Composite PMI for January surprised with a reading of 51.2, indicating that the ECB has no immediate reason to cut rates.

Trading Strategy

This change marks a significant shift from much of 2025 when the ECB was actively cutting rates to boost the economy, keeping the pair below the 1.1500 mark for several months. Now, with the ECB holding steady and the Fed looking to ease, the path ahead seems to favor upward movement. Considering the upcoming NFP report on Wednesday, buying spot positions carries notable event risk. A wiser strategy in the next few days would be to utilize options, such as buying call spreads on EUR/USD, to prepare for potential gains while limiting downside risk. Implied volatility is high before the data release, indicating that the market anticipates a sharp move in either direction. If the jobs report on Wednesday is weaker than expected, it would strengthen the belief that the Fed will cut rates this year. This could break the 1.1835 resistance and lead to a rise towards the psychological level of 1.2000 in the coming weeks. We would then look to add to long positions on any minor dips. Create your live VT Markets account and start trading now.

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