Dollar Pauses Euro Finds Support
In the US, ADP private sector employment rose by 63K in February versus 50K expected, after 11K in January. Despite this, the US Dollar Index was near 98.91, after reaching about 99.68 on Tuesday, its highest since 28 November. In the Eurozone, PPI rose 0.7% month-on-month in January after -0.3% in December, above the 0.2% forecast. Year-on-year PPI fell 2.1% versus -2.7% forecast, compared with -2.0% previously, while unemployment eased to 6.1% from 6.2%. Markets priced about a 40% chance of an ECB rate rise by year-end. CME FedWatch showed a fully priced hold in March and April, with a 36.4% chance of a 25-basis-point cut in June, ahead of ISM services PMI and Friday’s NFP. Looking back at this time in 2025, we saw the EUR/USD pair trying to find its footing around 1.1626 after the US Dollar rally seemed to be taking a pause. Today, with the pair trading near 1.0850, it is clear that the pause was temporary and the dollar’s strength was the dominant trend over the last twelve months. The US Dollar Index, which was trading around 98.91 then, has since solidified its position, recently trading consistently above 104.Positioning For Continued Dollar Strength
The fundamental driver has been the divergence in central bank policy, which defied market expectations from early 2025. While traders last year were pricing in a 40% chance of an ECB rate hike, the Eurozone’s cooling inflation through late 2025 led the ECB to instead begin cutting rates, with the first 25 basis point reduction coming in February 2026. Conversely, the dovish calls from Fed officials like Governor Miran for significant rate cuts in 2025 never materialized as the US economy remained resilient. Economic data has consistently reinforced this divergence, contrary to the optimistic European reports from January 2025. While Eurozone unemployment fell to 6.1% back then, it has since ticked up to 6.4% as of January 2026, weakening the case for a strong Euro. Meanwhile, the modest US private sector job growth of 63K seen in the February 2025 ADP report was dwarfed by a string of strong Nonfarm Payrolls reports, including last month’s addition of over 275,000 jobs. The geopolitical risk premium from the US-Iran conflict, a major concern for markets in March 2025, has since faded following de-escalation throughout the middle of last year. This removed a key inflationary pressure, allowing traders to focus more on the underlying weakness in the European economy compared to the United States. The shift has moved market concerns from supply-driven inflation to demand-driven growth differentials. Given this established trend, our focus should be on strategies that favor continued dollar strength against the euro. We should consider buying longer-dated EUR/USD put options with strike prices around 1.0700 to protect against further downside. Selling out-of-the-money call options with strike prices above 1.1000 could also be an effective strategy to collect premium, as a significant Euro recovery seems unlikely without a major policy shift from the Federal Reserve. Create your live VT Markets account and start trading now.
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