EUR/USD was mostly flat on Friday, trading near 1.1763 after briefly slipping to 1.1743. It was still set for a weekly loss. Price action was choppy as US GDP disappointed, while inflation data stayed firm. US Q4 2025 GDP grew at an annualised 1.4%, down from 4.4% in the previous quarter and below the 3.0% forecast. The GDP Price Index held steady at 3.7%.

Inflation Data Keeps Fed Outlook Cloudy

Core PCE inflation rose 0.4% month on month in December, up from 0.2% and above the 0.3% forecast. On a year-on-year basis, Core PCE climbed to 3.0% from 2.8%, beating the 2.9% forecast. Headline PCE also increased 0.4% month on month, up from 0.2% and above the 0.3% forecast. The annual rate edged up to 2.9% from 2.8%. The US Dollar Index hovered near 98.00 after dipping to around 97.80 earlier. Fed minutes highlighted ongoing inflation worries, even as markets continued to price in two rate cuts. CME FedWatch still pointed to June as the most likely timing for the first cut. S&P Global PMI data showed the Composite index at 52.3 (from 53.0), Manufacturing at 51.2 (from 52.4), and Services at 52.3 (from 52.7). Traders later looked to the University of Michigan Consumer Sentiment report, including inflation expectations. With late-month data sending mixed signals, the market is still struggling to find a clear direction. The drop in Q4 2025 growth to 1.4% suggests the economy is cooling. But December 2025 Core PCE at 3.0% points to inflation that remains sticky. This push-and-pull has kept EUR/USD stuck in a tight range, setting up a prolonged period of uncertainty.

Volatility Strategies Come Into Focus

More recent data has continued to support the “mixed picture” theme. January’s jobs report, released two weeks ago, showed strong hiring of 225,000 jobs. However, wage growth slowed unexpectedly to 0.2% month on month. That combination did little to settle the central question: is the consumer weakening, or is inflation still too persistent? Either way, it leaves the Federal Reserve in a tough spot. As a result, implied volatility in EUR/USD options has been edging up from recent lows. The market appears to be preparing for a breakout ahead of the next major inflation release. One way to position for this is with long-volatility strategies, such as buying straddles. These can profit from a large move in either direction, without needing to guess the trigger. Historically, periods like this—similar to what we saw in 2023—often end with a sharp repricing once the trend becomes clearer. Back then, markets had to quickly unwind rate-cut expectations when inflation stayed higher than expected. Because of that, holding positions that benefit from a volatility jump can make sense, even if option premiums are slightly higher right now. For those who think the gridlock will last, selling option premium is another approach. For example, iron condors with strikes outside the recent 1.1700–1.1850 range could work if EUR/USD stays range-bound for a few more weeks. That said, this strategy needs careful risk control, since an unexpected data surprise or Fed headline could trigger a fast breakout. Create your live VT Markets account and start trading now.

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