The dollar is falling as trading begins in Europe, continuing its decline from last week. The EUR/USD pair is nearing the 1.1800 mark, up 0.3% to 1.1797, which suggests it could rise further. However, large option expiries around this level may slow progress until the US retail sales data is released. Other currencies are also showing similar trends. The USD/JPY has dropped 0.4% to 146.72, while the GBP/USD has increased by 0.3% to 1.3638.

Attention on a Weaker Dollar

The spotlight on a weaker dollar is growing and could be a major concern if the Federal Reserve takes a softer approach in its upcoming announcements. The dollar’s decline is setting the stage for tomorrow’s important Fed meeting. Recent data supports this softer stance. The August 2025 inflation report showed the Consumer Price Index (CPI) cooling to 2.8%, falling short of expectations, marking the third consecutive monthly drop. This gives the Fed room to suggest that its tightening cycle, which began in 2023, is over. For traders watching EUR/USD, testing the 1.1800 level is crucial. Given the situation, buying out-of-the-money call options set to expire in the next few weeks might be a smart way to play a breakout above this level, especially if the Fed signals a gentler approach. This strategy aims for a significant upward move while managing risk, keeping in mind that large option expiries might limit movement in the short term. In USD/JPY, the drop toward 146.00 shows the market is expecting a reduction in interest rate differences. We might consider buying put options to take advantage of further declines in this pair if the Fed appears more dovish than anticipated. This trend is supported by the Bank of Japan’s slow policy normalization throughout 2025, which has bolstered the yen.

Higher Volatility Around Fed Shift

The key takeaway for the coming weeks is that volatility is likely to increase due to the Fed pivot. Traders might think about volatility plays, like purchasing straddles on major pairs like EUR/USD, which could benefit from a significant price move in either direction after tomorrow’s announcement. This approach is wise since market reactions to policy changes are often sharper than the initial signals. We have seen similar patterns during past Federal Reserve shifts, such as the late 2023 shift when signals of halting rate hikes led to a multi-month decline in the dollar index. The recent economic data, especially the lower-than-expected August non-farm payrolls, which showed only 150,000 new jobs, suggests we are entering a similar period. This historical context strengthens the belief that we may be at the beginning of a longer-term trend of dollar depreciation. Create your live VT Markets account and start trading now.

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