EUR/USD holds steady at 1.1665 during early Asian trading on Tuesday. Traders are considering the possible effects of legal actions against the Federal Reserve. The US Justice Department is reportedly looking into Federal Reserve Chair Jerome Powell’s statements about building renovations, which could influence the value of the US Dollar. Concerns about the Federal Reserve’s independence might put pressure on the USD. Meanwhile, indications that the European Central Bank (ECB) might be nearing the end of its rate cuts could support the Euro. ECB Vice President Luis de Guindos recently stated that interest rates seem adequate, but geopolitical risks could still impact future rate decisions.

Financial Markets Expectation

Financial markets expect few immediate changes in rates. Some believe a reduction might only happen by 2026, while a rate hike seems unlikely due to low inflation. All eyes will be on the US CPI inflation data for December, which is expected to show a 2.7% increase. This could influence the USD’s short-term performance. The Euro, used by 20 European Union countries, is the second most traded currency worldwide, making up 31% of all foreign exchange transactions in 2022. The ECB, based in Frankfurt, manages monetary policy and affects the Euro through interest rate adjustments based on inflation and economic data. Political pressure on the Federal Reserve in 2025 created strong headwinds for the US dollar. Now that the political noise has calmed, attention is on the differing monetary policies between the US and Europe. This situation suggests that the EUR/USD may trend upward in the coming weeks.

Eurozone Inflation and Impact

Eurozone inflation has remained persistently high, with the latest Harmonized Index of Consumer Prices for December 2025 showing 3.1%, far above the ECB’s target. This makes it challenging for the ECB to consider rate cuts, providing strong support for the Euro. Derivative traders might want to buy EUR/USD call options to take advantage of this forecasted strength. In the US, the Consumer Price Index has eased, with the December 2025 figure at a more manageable 2.9%. This allows the Fed to keep its rates steady, reducing the chance of further hikes that could strengthen the dollar. With the narrowing interest rate gap, selling US dollar call options against a basket of currencies becomes an appealing strategy. Given the uncertainty surrounding central bank actions, implied volatility in EUR/USD options may increase ahead of the next policy meetings. A long straddle strategy—buying both a call and a put option with the same strike price and expiration—could be profitable. This strategy would benefit from substantial price movements in either direction, providing protection against unexpected policy changes. Create your live VT Markets account and start trading now.

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