Since mid-September, the EUR/USD pair has been declining. Jane Foley, an analyst from Rabobank, attributes this to shifts in trading positions. The EUR/USD rate dropped to 1.16 as traders cut back on their short positions on the US dollar. Previously, many held long positions on the Euro and short positions on the dollar, driven by expectations of aggressive interest rate cuts by the Fed and worries about the dollar losing its safe-haven status.

US Dollar as a Safe Haven

Despite some challenges, the US dollar is likely to stay a safe haven. This is due to the size of US capital markets and the global power of the currency. Still, future decisions by the Fed and changes in leadership could affect the dollar’s strength. Recently, short covering for the dollar brought EUR/USD back to the 1.16 range. In the coming months, traders expect volatile trading, with delays in reaching the 1.20 level because of economic uncertainties in Europe. This situation might continue until next spring. We recall the market correction from late 2024, when unwinding short dollar positions pushed EUR/USD down towards 1.16. As of October 16, 2025, the pair struggles to stay above 1.1850, indicating that gaining upward momentum is still tough. This suggests that the fundamental issues from that time continue to linger. Similar to 2024, traders are again betting against the dollar. Recent CFTC data shows that speculative net-short positions have risen for the fourth straight week. However, the Federal Reserve has been more hawkish than expected through 2025, keeping rates steady last month as services inflation stayed above 3%. This raises the risk of another sharp short squeeze if upcoming US economic data surprises positively.

The Path to 1.20

The expected rise to 1.20, postponed from last spring, still faces obstacles due to ongoing weaknesses in Europe. Germany’s latest IFO Business Climate index dropped to 92.5, the lowest since the energy price worries of 2024, dampening enthusiasm for the Euro. This weakness makes long Euro positions vulnerable, especially if the European Central Bank adopts a more dovish stance in its next meeting. Given this situation, range-trading strategies might be wise for the coming weeks. One-month implied volatility in EUR/USD options has increased to 7.8%, indicating that the market anticipates volatility rather than a clear breakout. Traders may think about selling out-of-the-money calls near the 1.20 resistance or buying puts to protect against a fall back toward the 1.17 level. Create your live VT Markets account and start trading now.

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