Market Adjustments

The futures market has lowered expectations for Federal Reserve interest rate cuts. This change is reflected in the updated interest rate probabilities on the Prime Market Terminal. In November, Eurozone industrial production increased by 0.7%, surpassing expectations, and contributing to a 2.5% growth in annual output. Traders are now looking ahead to inflation data from the Eurozone and figures for US Industrial Production to guide their decisions. Federal Reserve officials have expressed mixed views on monetary policy, impacting market outlooks. The EUR/USD currency pair showed bearish momentum, dipping briefly to 1.1593. Future movements will depend on whether it can break above the 1.1600 mark. Support is expected at the 200-day simple moving average (SMA) of 1.1582, while resistance is around 1.1700. The strength of the US dollar remains a key theme, fueled by a strong American labor market and better-than-expected factory performance. This positive news is making investors rethink projected Federal Reserve interest rate cuts in 2026. The market quickly adjusted its expectations from 52 to 46 basis points of easing, indicating a clear sentiment shift. This viewpoint is backed by the fourth-quarter 2025 inflation data, which showed that the core Consumer Price Index (CPI) remained stubbornly above 3.0%. This persistence explains the cautious tone from Fed officials and supports the idea that monetary policy may remain tight longer than previously anticipated. As a result, we can expect the dollar’s yield advantage over the euro to widen in the following weeks.

European Market Focus

In contrast, the euro is struggling to gain support, despite positive industrial output figures. The market is closely monitoring the European Central Bank’s potential moves to cut rates, especially as Eurozone inflation appears to be cooling faster than in the US during late 2025. Upcoming inflation reports from Germany and Italy will be crucial; any signs of weakness will further highlight the euro’s challenges. For derivative traders, this situation suggests that buying put options on the EUR/USD is a direct strategy for continued declines. A drop below the key 1.1600 level opens the door to targeting the 200-day moving average around 1.1582 and potentially the 1.1500 mark. These options offer a low-risk way to take advantage of the bearish trend. However, traders should be ready for short-term reversals, especially with the upcoming European inflation data. If inflation unexpectedly spikes, it could trigger a sharp rally. Traders with short positions might consider buying affordable out-of-the-money call options with a strike price above 1.1700 to hedge against this possibility. Looking back to the 2021-2022 period from our perspective in 2025, we saw a similar situation where the aggressive Fed policy diverged from the ECB’s stance, resulting in a significant drop in the EUR/USD. The current scenario, where the Fed remains steadfast while the ECB appears more lenient, reflects that history. This suggests that, for now, the path of least resistance for the pair leans downward. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now