During Monday’s North American session, the EUR/USD was mostly stable, edging down by 0.05% to about 1.1643, having peaked at 1.1675 earlier in the day. US economic activity was low due to a government shutdown that has lasted for twenty days. Market focus in the US is on local politics and comments from President Donald Trump, who mentioned potential risks regarding China and plans to visit the country next year. Traders are also paying close attention to the Consumer Price Index (CPI) report set to be released on Friday.

European Market Overview

In Europe, officials from the European Central Bank (ECB), including Bundesbank President Joachim Nagel, expressed a desire to observe economic trends before making rate changes. The German Producer Price Index (PPI) for September was softer than expected for the third month in a row, yet the EUR/USD remained stable. Market players are looking forward to speeches from ECB President Christine Lagarde. The US Dollar Index (DXY) rose by 0.08% to 98.62. Trump mentioned that 100% tariffs on China are “unsustainable” and confirmed he will meet with President Xi Jinping of China. Key resistance levels for EUR/USD are the 100-day SMA at 1.1650, the 20-day SMA at 1.1677, and the 50-day SMA at 1.1692. Support levels are at 1.1600, 1.1550, and 1.1500. Reflecting on the past, the market was previously confined to a tight range around 1.1650, influenced by political issues like government shutdowns and trade talks. Today, October 21, 2025, the context has changed significantly, with EUR/USD trading near 1.0520. The primary influence is now a major split in central bank policies.

Monetary Policy Divergence

The earlier government shutdowns have become irrelevant, with attention now fully on the Federal Reserve’s efforts to control inflation. The US Consumer Price Index for September 2025 showed inflation at 3.1%, putting pressure on the Fed to keep its strict policies. This data strengthens the dollar, as futures markets now indicate a 40% chance of one more rate hike this year. On the other hand, the European Central Bank has shifted from a “wait-and-see” approach to a more dovish stance. With Eurozone inflation dropping to 2.5% and recent German PPI figures showing a decline for the fourth month in a row, ECB officials are discussing when to start rate cuts in 2026. This growing gap between a hawkish Fed and a dovish ECB is dragging down the euro. For derivative traders, this suggests that betting on further euro weakness is the safest option. Buying long-dated EUR/USD put options, with a strike price around 1.0300 and an expiry in early 2026, could capitalize on this split in monetary policy. Implied volatility for 3-month options has risen to 8.5%, indicating market expectations of ongoing declines. We’ve seen similar situations before, like in 2014-2015, when a similar policy divergence caused the EUR/USD to drop by over 20%. Back then, the US Dollar Index was at 98.62, and it now stands well above 107, nearing last year’s highs. Thus, any short-term increases in the euro towards the 1.0600 resistance should be viewed as chances to sell EUR futures or set up bearish option spreads. Create your live VT Markets account and start trading now.

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