EUR/USD hit an 8-week high around 1.1700, mainly driven by the Federal Reserve’s 25 basis point rate cut. This led to a 0.59% rise on Wednesday, as traders moved away from the Dollar due to the Fed’s dovish approach. Fed Chair Jerome Powell mentioned that future policy decisions will depend on economic data, indicating a neutral stance. Most supported the Fed’s decision to cut rates, though three members preferred different tactics. The Dollar Index fell by 0.58% to 98.68. Predictions show the fed funds rate might be about 3.4% next year, hinting at a potential additional cut. In the Eurozone, no major updates occurred, but ECB members expressed confidence in achieving a 2% medium-term inflation target. For six sessions, EUR/USD has been consolidating between 1.1650 and 1.1700, with the Relative Strength Index suggesting bullish momentum. If the Euro falls below 1.1650, it may drop further past several support levels. The Euro is the second most traded currency, accounting for 31% of global exchange transactions in 2022. Its strength depends on ECB policies, interest rates, inflation, economic data, and trade balances. The Federal Reserve’s rate cut has changed the market, indicating a likely end to the US dollar’s strength for now. There is a clear divide between the dovish Fed, which is currently on hold, and a confident European Central Bank. This situation favors holding long positions in the Euro against the dollar in the coming weeks. This Fed shift is part of a larger trend, as US inflation rates fell throughout 2025, ending 2024 at 3.1%. In contrast, the ECB faces ongoing price pressures, with inflation at 2.4% last year, reducing their likelihood of cutting rates. Derivative traders might look into strategies that benefit from the EUR/USD rate rising, such as buying call options with strike prices above 1.1700. Powell’s focus on employment risks signals continued weakness for the dollar. Initial jobless claims in November 2025 rose to over 230,000, supporting the Fed’s cautious view. Shorting the US Dollar Index (DXY) could be a good strategy, possibly using put options or futures contracts. For EUR/USD, the key test is whether it can stay above the 1.1700 level. A strong break above this point could lead to a quick move toward 1.1800 and even reach the year-to-date highs around 1.1918. Using simple vanilla call options may be a low-risk way to prepare for this potential breakout. This pause in policy resembles the “mid-cycle adjustment” of 2019, when the Fed cut rates three times before holding steady for over six months. During that time, the dollar generally weakened against other currencies. This historical pattern suggests the current dollar weakness could last into early 2026. Additionally, the Euro shows significant strength against the Japanese Yen. With the Bank of Japan unlikely to change its loose monetary policy soon, taking long positions in EUR/JPY may present an even stronger opportunity. This strategy takes advantage of the policy gap between the stable ECB and the consistently dovish BoJ.

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