The Euro gained strength against the Dollar, rising above 1.16 after comments from Federal Reserve Chairman Jerome Powell. Powell’s decision to take a “meeting-by-meeting” approach, prioritizing labor market risks over inflation concerns, played a big role in this shift. Additionally, France’s choice to pause pension reforms positively influenced the Euro. On the other hand, rising tensions between the US and China negatively impacted the Dollar, alongside a drop in US business confidence.

US Dollar Index Declines

The US Dollar Index dropped by 0.25%, hitting 99.00. A decrease in the NFIB Business Optimism Index and a 7-point increase in the Uncertainty Index highlighted worrying trends for US businesses. The chances of a rate cut by the Federal Reserve at their next meeting rose significantly, now sitting at 97% for a 25-basis-point cut. In Germany, the ZEW Economic Sentiment indicator was below expectations, even though it improved from last month. Despite these changes, the EUR/USD pair remains technically bearish, trading below the 100-day Simple Moving Average. Future economic updates, such as US inflation data, will be crucial in guiding market movements. The prevailing theme is the Federal Reserve’s dovish shift, with markets anticipating a 97% chance of a rate cut on October 29. This has pushed the EUR/USD above the 1.1600 mark. Derivative strategies should concentrate on this clear momentum as we approach the end of the month.

Powell’s Focus on Labor Market

Powell’s emphasis on labor market risks is justified, especially after the latest Non-Farm Payrolls report for September 2025 showed job growth slowing to just 150,000. With the NFIB Uncertainty Index reaching its fourth-highest level in over 50 years, a cautious approach is warranted. The Dollar is likely to be under pressure as long as this weak data persists. While the Euro is gaining, we must also consider the European Central Bank’s dovish signals and Germany’s lackluster ZEW data. The recent flash Harmonized Index of Consumer Prices (HICP) for the Eurozone was at 2.5%, still above target but on a downward trend. This indicates that the Euro’s rally might be limited, making it more of a “sell the Dollar” strategy rather than a “buy the Euro” one. With conflicting signals and increasing US-China tensions, we should expect more volatility in the coming weeks. The upcoming US Consumer Price Index (CPI), to be released on October 24, poses a significant risk that could challenge the current dovish outlook. Considering this, buying straddles or strangles on the EUR/USD may be a wise way to prepare for a potential major price move in either direction following that data release. After the aggressive rate hikes of 2022-2023, the Fed is now more data-dependent, and Powell’s “meeting-by-meeting” approach is a critical consideration. With US core inflation last reported at 3.5%, an unexpectedly high CPI report could quickly change Fed expectations. Purchasing inexpensive out-of-the-money EUR/USD put options with expirations after the Fed meeting can provide a cost-effective hedge against a hawkish surprise. Create your live VT Markets account and start trading now.

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