The EUR/USD exchange rate might rise as the Federal Reserve is expected to cut rates in December, supported by important market trends. Recently, European Natural Gas prices dropped to their lowest since early 2024, making the Euro more appealing. However, cold weather could tighten the market and break these gains.

Federal Reserve Rate Cut Expectations

Danske Bank expects the Federal Reserve to lower interest rates, which could push the EUR/USD higher. The natural gas market plays a surprising role in this support. European prices have plummeted, narrowing the gap with US prices to the tightest point since 2021. This change helps European manufacturers by making them more competitive, while US energy sellers may face lower revenue. Despite the current favorable conditions for EUR/USD, risks remain due to low European gas storage levels for this time of year. A sudden cold spell could boost demand, deplete supplies, and potentially drive European gas prices up, tightening market conditions again. With a rate cut widely anticipated at the Federal Reserve meeting later this month, structural factors could lift the EUR/USD. Recent data indicates that US inflation cooled to 2.8% in November 2025, leading futures markets to believe there is an 85% chance of a 25-basis point cut on December 17th. This expectation has already pushed the currency pair closer to a six-month high of 1.0950. The Euro also gains support from falling natural gas prices. European natural gas prices have hit their lowest levels since early 2024, and the difference in price compared to US gas is the narrowest since 2021. This benefit supports European manufacturers, while US energy exporters might see reduced incomes, creating a positive environment for EUR/USD.

Risks to the Positive Outlook

The biggest risk to this positive outlook is a sudden cold snap. Currently, European gas storage facilities are at 88% full, lower than the five-year average of 92% for early December. For traders, buying EUR/USD call options to take advantage of the expected Fed cut seems sensible. However, purchasing out-of-the-money put options could act as a safety measure against a sudden reverse due to weather changes. It’s essential to keep an eye on weather forecasts, as some show an increased chance of a polar vortex affecting Northern Europe before year-end. The energy price spike in 2022 serves as a reminder that the Euro is sensitive to sudden energy shocks, pushing it below parity. Therefore, call options on Dutch TTF gas futures could also be considered a direct hedge against this risk for Euro positions. Create your live VT Markets account and start trading now.

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