The EUR/USD is currently trading at multi-week highs, driven by a weaker US Dollar and a cautious outlook from the Federal Reserve. The Euro has gained strength following last week’s 25 basis point rate cut by the Fed, with the pair now around 1.1760, its highest since early October. The US Dollar Index is close to 98.18, nearing a two-month low. Comments from Fed Governor Stephen Miran have put pressure on the Dollar, suggesting a larger rate cut is needed and that current policies are too strict. He pointed out that shelter inflation is connected to past supply-demand issues, indicating that a faster pace of easing could be suitable.

US Economic Indicators

The New York Empire State Manufacturing Index dropped significantly to -3.9 in December from 18.7 in November, missing the expected 10.6. Several US economic data releases are set for this week, which could impact future Fed policy. Key focus areas include the postponed Nonfarm Payrolls and Consumer Price Index reports. Meanwhile, the Eurozone’s economic calendar is less busy at first. Eurozone Industrial Production increased by 0.8% in October, surpassing expectations. Attention will shift towards upcoming surveys and the European Central Bank’s (ECB) interest rate decision, with the ECB likely to keep rates steady, supporting the Euro’s rise against the Dollar. After last week’s 25 basis point rate cut from the Federal Reserve, marking the first major policy change in over a year, the outlook for the US Dollar has turned negative. A key Fed official has already stated that the current policy is “unnecessarily tight,” hinting that more rate cuts may be on the table. This environment should bolster support for the EUR/USD pair in the short term. With the pair trading around 1.1760, it may be wise to consider strategies that capitalize on further gains while managing risk related to this week’s key data releases. Options like buying call options or implementing bull call spreads on EUR/USD would provide a direct approach to benefit from a stronger Euro. The upcoming US payroll and inflation reports are potential triggers that could push the pair above the 1.1800 mark. The significant drop in the New York Empire State Manufacturing Index to -3.9 is a strong signal for the US economy, especially when compared to the positive performance seen throughout most of 2024. This underscores the Fed’s choice to begin easing policy. The US Dollar Index (DXY) reflects this, currently hovering around 98.18 after peaking above 106 in the third quarter of 2024.

Market Implications

On the other hand, the European Central Bank (ECB) is not facing the same situation and is likely to keep interest rates steady this week. Eurozone core inflation remains persistent, with November data showing a 2.7% year-over-year rise, pressuring the ECB against easing policy. This growing divide between a cutting Fed and a static ECB is a key factor driving a stronger EUR/USD. We should expect increased price fluctuations as implied volatility for EUR/USD is anticipated to rise ahead of crucial US data releases. One-month implied volatility, which was around a low of 5.8% last month, has already increased to 7.2% and may rise further. Buying options now, before this expected volatility spike, could be a cost-effective strategy. If the US jobs and inflation data this week comes in weaker than anticipated, it would reinforce the market’s dovish outlook for the Fed and may lead to a surge in EUR/USD. In such a case, we would plan to target the 1.2000 psychological level, possibly using longer-dated call options expiring in January or February 2026 to capture a sustained trend. Create your live VT Markets account and start trading now.

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