**Foreign Demand for Eurozone Assets** The EUR/USD exchange rate is expected to reach 1.20 by the end of 2025 and 1.22–1.25 by late 2026. However, several risks could affect this prediction, including ongoing US inflation, a strong job market, geopolitical tensions, potential US tariffs on the EU, and European political issues like French fiscal risks. Currently, the exchange rate is just over three figures away from these targets. With a high chance of a Federal Reserve rate cut in September, we foresee EUR/USD climbing up. The July 2025 jobs report showed a gain of only 95,000 jobs, well below the expected 180,000, indicating a weakening US labor market. Fed Funds futures now suggest an 85% probability of a 25 basis point cut next month, which could weaken the dollar. Derivative traders might want to position themselves for this rise by targeting the 1.20 level by year-end. Buying EUR/USD call options expiring in December 2025 allows for potential profits from this expected increase while limiting risks. Bull call spreads could also be considered to lower initial costs, especially as implied volatility might rise before the Fed meetings. **Strength of the Euro Side** The euro’s outlook looks positive, supporting expectations for the pair to rise. Germany’s ZEW Economic Sentiment index recently reached an 18-month high in August 2025, indicating that potential fiscal stimulus is boosting confidence. This is a sharp contrast to the declining sentiment in the US. As the Fed begins to cut rates, the costs for holding non-dollar assets will decrease, encouraging large funds to sell US dollar holdings. We are already seeing strong foreign demand for eurozone assets, and this trend is likely to grow. This selling pressure on the dollar may lead to a self-fulfilling rally in the euro. We must note that the 1.20 level is a significant technical barrier, acting as major resistance due to a double-top formation from early 2021. As we move closer to this level, selling pressure is expected, so traders should plan to take profits or adjust positions. Historical trends suggest that the climb may not be straightforward. The main risk to this outlook is persistent US inflation, which could cause the Fed to delay or reduce its planned cuts. The latest July 2025 CPI reading of 2.8% has cooled, but it still exceeds the Fed’s target. To hedge against sudden market changes, traders could buy inexpensive, out-of-the-money puts to protect long positions if the US job market unexpectedly strengthens. Create your live VT Markets account and start trading now.

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