The EUR/USD pair pulled back as the US Dollar stabilized after recent economic data from the US. The Personal Consumption Expenditures (PCE) index for September met expectations, keeping inflation outlook steady. The Euro lost some earlier gains, trading around 1.1635 after hitting a daily high of 1.1628. However, the pair is still on track for its second consecutive weekly gain, with growing expectations for a Federal Reserve rate cut.

September Report

In September, the PCE report showed a 0.2% monthly rise in Core PCE, consistent with predictions. The annual rate slightly dipped to 2.8%. The headline PCE stayed steady at 0.3% for the month, also matching forecasts. Personal Income increased by 0.4%, exceeding forecasts, while Personal Spending rose by 0.3%. Meanwhile, the University of Michigan survey indicated better consumer sentiment, with the Consumer Sentiment Index climbing to 53.3. Labour data had mixed results: ADP Employment Change fell, Challenger Job Cuts decreased, and Initial Jobless Claims also dropped. These factors support a likely dovish Federal Reserve approach, with markets seeing an 87% chance of a 25 basis point rate cut at the next policy meeting. The US Dollar gained strength, especially against the Japanese Yen.

Market Expectations

As the US Dollar weakens, the EUR/USD is moving closer to its recent highs around 1.1635. Today’s job numbers, particularly November’s Non-Farm Payrolls, were much lower than expected at just 95,000. This strengthens the market’s view that the Federal Reserve is ready for a policy change. This weak hiring news comes right after the October Personal Consumption Expenditures (PCE) report showed core inflation easing to 2.8%. This situation parallels late 2023 when slowing inflation and job growth led to a significant policy shift. Together, these data points build a strong case for a more dovish Fed. As a result, expectations for a rate cut at the December 16-17 meeting have surged. The CME FedWatch Tool now shows a 91% chance of a 25 basis point cut, up from 70% just a week ago. This change in sentiment is driving current currency movements. For derivative traders, this indicates potential for continued dollar weakness against currencies like the Euro in the upcoming weeks. We should look at buying call options on the EUR/USD to profit from upward movement while limiting potential losses. Implied volatility is expected to rise significantly as we approach the Fed’s announcement on December 17th. The main risk to this outlook is unexpectedly strong data or hawkish comments from a Fed official before the meeting. Thus, it’s wise to consider strategies that protect against a sudden dollar rally if the Fed decides not to cut rates. This could involve buying inexpensive, out-of-the-money put options on the EUR/USD as a hedge. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now