The EUR/USD pair is seeing slight gains, trading around 1.1645 in the early Asian session on Monday. A potential rate cut by the US Federal Reserve in December may impact the US Dollar while providing support for the Euro. Later, we expect reports on German Industrial Production and Eurozone Sentix Investor Confidence.

Interest Rate Influence

Market sentiment shows there’s an 87% chance of a 25 basis points rate cut by the Fed, adjusting the federal funds rate to a range of 3.50%-3.75%. If the Fed makes a “hawkish cut,” this could strengthen the US Dollar and put pressure on the EUR/USD pair. On the other hand, Eurozone inflation was slightly above expectations in November, which reduces the urgency for a European Central Bank rate cut. The Euro represents 20 EU countries and is the second most traded currency globally, with EUR/USD being the most popular trading pair. The European Central Bank sets monetary policy to maintain price stability by adjusting interest rates, which affects the Euro’s value. Eurozone inflation data is key in deciding interest rate changes. Economic indicators like GDP and employment figures also affect the Euro’s strength. A positive Trade Balance, where exports exceed imports, usually boosts a currency’s value. Major economies in the Eurozone, like Germany and France, play a significant role in shaping the region’s economy and the Euro’s performance. With the Federal Reserve meeting coming up on Wednesday, December 10th, the market has already priced in an 87% chance of a rate cut. This outlook is supported by recent data, including last Friday’s Non-Farm Payrolls report, which showed only 85,000 jobs added, and October’s US CPI data indicating core inflation has softened to 3.1%. The main focus now is not just on the cut itself but on the Fed’s future guidance.

Monetary Policy Divergence

Given this context, we expect increased implied volatility for EUR/USD options that expire this week. The biggest risk is a “hawkish cut,” where the Fed lowers rates but signals a pause in its easing cycle through its dot plot updates. A smart strategy would be to use options to prepare for a bigger-than-expected market move. A dovish statement could push the pair significantly higher, while a hawkish surprise could reverse recent gains. Looking at the other side of the pair, the European Central Bank seems set to maintain its policy rate at its next meeting on December 18th. The latest Eurozone HICP inflation for November 2025 stands at 2.8%, remaining above the central bank’s 2% target. This difference in policy, with the Fed easing while the ECB holds steady, creates a favorable backdrop for the Euro. This situation reflects a shift similar to what we witnessed in 2024, but now the roles are reversed. At that time, the ECB was cutting rates, while towards the end of 2025, the Fed appears to be the more aggressive easer. Historically, these periods of divergent policies have driven sustained trends in currency pairs, indicating potential strength for the Euro against the Dollar into early 2026. Create your live VT Markets account and start trading now.

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