In the early Asian session, the EUR/USD pair is trading around 1.1775. This move is supported by expectations that the US Federal Reserve will cut rates again in the future. Meanwhile, there’s little expectation for a European Central Bank (ECB) rate cut until early 2026, keeping the Euro strong against the US Dollar. In December, the Federal Reserve cut the federal funds rate by 25 basis points, bringing it to a target range of 3.50%-3.75%. So far in 2025, they’ve reduced rates by a total of 75 basis points. The possibility of more cuts next year is putting downward pressure on the US dollar.

Potential New Fed Chair

A new Federal Reserve Chair who is expected to have a dovish stance could further weaken the US dollar. In contrast, the ECB has kept its rates steady and takes a careful, data-driven approach to future rate changes. Money markets show a low chance of a 25 basis point rate cut by the ECB by February 2026. Current signs suggest that the ECB’s rate-cutting cycle might soon come to an end, which could boost the Euro’s position. Trade balance figures and economic indicators like GDP and employment data are essential in determining the Euro’s strength. A robust economy and a positive trade balance typically support the Euro against other currencies. With the EUR/USD trading firmly above 1.1750, this signals ongoing weakness in the US Dollar as we approach the new year. This trend stems from the belief that the Federal Reserve will continue cutting interest rates in early 2026. The differences in monetary policy—a dovish Fed versus a cautious ECB—are key factors in supporting the Euro.

US Market Trends and Predictions

Looking back at 2025, the Fed implemented 75 basis points in cuts as the US labor market showed signs of slowing down. Recent data backs this up: the November Non-Farm Payrolls report revealed job growth of only 130,000, with the unemployment rate rising to 4.1%. This slowdown, along with Core PCE inflation decreasing to 2.9%, gives the Fed good reason to maintain an easing policy in the months ahead. In contrast, conditions in Europe are different, helping to strengthen the Euro. The latest Eurozone Harmonized Index of Consumer Prices (HICP) for November 2025 was still high at 3.2%, well above the ECB’s target. This supports the idea that there’s only a slim chance of an ECB rate cut in February, affirming the central bank’s steady approach. For traders, this suggests a strategy of buying EUR/USD call options to take advantage of the expected upward movement with limited risk. With Fed actions expected in the first quarter, options that expire in March 2026 could be well-placed to benefit from the differences in policy. The anticipated nomination of a new Fed Chair in May 2026 adds to expectations for a politically influenced, low-rate environment for the dollar. This scenario resembles what we saw in the mid-2010s, when ECB easing against a tightening Fed led to a significant drop in the Euro. Now, the roles are reversed, which could support a sustained rally for the EUR/USD pair. We’ll pay close attention to today’s US Pending Home Sales data for any potential shifts in this outlook. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now