The EUR/USD pair changed direction as gains were lost after the Federal Open Market Committee (FOMC) made its decisions and US jobless claims data was released. Initially, the USD dropped after the Fed’s announcement but later gained strength as traders re-evaluated a more hawkish outlook for interest rates.

Impact of the Federal Open Market Committee

The FOMC’s dot plot shows that a slight majority expects two rate cuts in 2025, which is less than what the market had anticipated. Additionally, only one rate cut is expected in 2026, down from three. Fed Chair Powell described the rate cut as a move to manage risks due to weak labor market data. Strong jobless claims data that followed also helped the USD strengthen. Future data releases will continue to affect rate expectations and the USD’s performance. As for the Euro, the European Central Bank (ECB) kept interest rates steady, relying on data to guide their decisions. President Lagarde mentioned that the period of disinflation is over, with little easing expected by 2026. Technically, the EUR/USD pair tested but could not hold above its 2025 high, showing the strength of the USD. Buyers are using trendline support for potential gains, while sellers are waiting for a drop toward the 1.16 mark. Key upcoming economic events include the Eurozone and US Flash PMIs, a speech by Fed Chair Powell, US Jobless Claims, and the US PCE report, all of which may impact market conditions. The Federal Reserve’s recent guidance appears more hawkish than we had anticipated. The dot plot indicates a tight majority favoring just two more rate cuts in 2025, a significant change from previous market expectations. This adjustment is strengthening the dollar and erasing earlier gains in the EUR/USD pair.

Labor Market and Economic Indicators

We are closely monitoring US labor market data for direction. July and August 2025 saw weaker Non-Farm Payrolls, with job additions of just 150k and 145k. However, last week’s jobless claims suggested a stronger underlying labor market, as claims dropped to 210,000 for the week ending September 20th. This indicates resilience that supports the Fed’s cautious approach. Conversely, the ECB seems to have completed its rate-cutting cycle for now. President Lagarde mentioned that growth risks are balanced, leading the market to expect a slight 11 basis points of cuts by the end of 2026. This steady stance from the ECB contrasts with signs of economic softening, as the Eurozone’s August Flash Manufacturing PMI remained below 50 at 48.5. The difference between a surprisingly strong Fed and a slowing European economy suggests that option traders should prepare for increased volatility. Given the current uncertainty, especially ahead of critical data, strategies like straddles or strangles could be beneficial to capitalize on significant market moves. Implied volatility may rise leading up to the US PCE inflation report this Friday. From a technical viewpoint, the upward trendline on the daily chart is a crucial battleground. Bullish traders might sell put options at this level, betting on support holding. Conversely, a confirmed break below this line would indicate a shift in momentum and likely prompt traders to buy puts or start short futures positions targeting the 1.1600 level. This week’s US PCE data will be a vital factor in determining our next moves. We remember how persistent inflation was in late 2024. The market will pay close attention to the upcoming report for August 2025. The consensus expects Core PCE to show a year-over-year increase of 2.8%. Any number above this could reinforce the Fed’s hawkish tone and trigger a significant dollar rally. Create your live VT Markets account and start trading now.

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