EUR/USD is getting modest support. This is mostly due to expected US dollar weakness, not euro strength. The euro does not look clearly undervalued. The European Central Bank is also staying cautious, even as Germany adopts a more expansionary fiscal stance.
The Federal Reserve sounds firmer than markets expect. A later start and smaller scale US rate-cut cycle could cap further gains in EUR/USD.
Central Bank Divergence Limits Upside
The euro has benefitted as the main alternative to the US dollar when the dollar’s risk premium rose, driven by erratic US policymaking. This briefly pushed EUR/USD above 1.20 in January.
Even so, the upside seems more limited than for currencies like JPY or CNY, where undervaluation is easier to argue. Germany’s fiscal approach should help keep Eurozone growth steadier through 2026.
We expect upside in EUR/USD to stay constrained in the coming weeks because central bank paths are diverging. The Federal Reserve is signaling it will ease policy more patiently than markets anticipate. This mix should limit large gains in the pair.
Recent US data supports this firmer Fed stance. January 2026 core PCE inflation held at 2.9%, and the latest jobs report showed a resilient labor market. These readings lower the pressure for the Fed to deliver deep cuts, which helps the dollar’s relative appeal.
Potential Approaches For Derivative Traders
By contrast, Eurozone inflation is still cooling. The latest Harmonised Index of Consumer Prices (HICP) eased to 2.1%. That gives the ECB more room to consider easing sooner than the Fed. A cautious tone from ECB officials also supports the view that the euro lacks strong, independent drivers for sustained appreciation.
We remember how erratic US policymaking briefly lifted the pair above 1.20 in January 2025, as the dollar risk premium rose. But that was an unusual setup. Today, the euro still lacks a strong undervaluation case to repeat that kind of move. Germany’s steadier fiscal policy may provide a floor, but it is unlikely to drive a major rally on its own.
For derivative traders, this backdrop may favor selling out-of-the-money EUR/USD call options into rallies to collect premium. Bearish setups, such as buying puts or using put spreads, may also be considered to hedge or seek gains if the pair falls. Overall, conditions look less supportive for strategies that depend on a strong, sustained uptrend.
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