EUR/USD dipped to about 1.1745 during early Asian trading on Wednesday. This followed the release of Federal Reserve minutes, which showed expected rate cuts on the horizon. The European Central Bank (ECB) held rates steady earlier this month and hinted they may remain unchanged for a while. The Federal Reserve meeting on December 9-10 ended with a 25 basis point rate cut, bringing the federal funds rate to a range of 3.50% to 3.75%. There was some internal debate, with some Fed members favoring no change or a larger cut. Many officials expect further rate reductions if inflation continues to decline.

Federal Reserve’s Rate Cut Debate

After the Fed minutes, the chances of a rate cut in January fell to 15%, according to the CME FedWatch Tool. Meanwhile, the ECB has suggested that the cycle of rate cuts is close to ending, potentially stabilizing the Euro. The Euro is the official currency for 20 EU countries and ranks second in global trading. The ECB, based in Frankfurt, oversees monetary policy with a focus on price stability. It meets eight times a year to adjust interest rates, which affects the Euro’s value by controlling inflation. Key economic indicators like GDP and inflation significantly impact the Euro’s strength. A strong economy or a good trade balance usually boosts the Euro, drawing in international investments. As we approach year-end, the EUR/USD pair is around 1.1745. Recent Fed meeting minutes indicate more rate cuts are likely, yet the dollar has gained some temporary strength. This suggests market uncertainty regarding the Fed’s next step, especially in the low trading volumes of the holiday season.

Economic Indicators and Currency Influence

The Fed’s cautious approach makes sense given recent inflation data, which showed the US Consumer Price Index dropped to 3.1% in November. With the unemployment rate steady at 3.7%, the central bank can ease policies without straining the labor market. These numbers support further rate cuts in early 2026. In Europe, the ECB is taking a different path by keeping rates steady. Eurozone inflation was still sticky at 2.4% in the latest Harmonized Index of Consumer Prices. This data reflects the ECB’s careful, methodical approach, which limits downside risks for the Euro for now. The differing directions of these central banks are creating market tension, evident in rising volatility for EUR/USD options. Traders should consider strategies that can benefit from either stability or a sharp price movement once liquidity increases. Making simple bets seems risky until a clearer trend develops in the new year. In the short term, attention will shift to key data releases in early 2026. The upcoming US Non-Farm Payrolls report and preliminary Eurozone inflation data for December will be crucial. These results will likely reveal whether the dollar’s current strength is a temporary phenomenon or the beginning of a new trend. We can compare this situation to the rate-cutting cycle of 2019 when the Fed’s easing led to choppy behavior in EUR/USD. History shows that the start of a difference in monetary policy usually results in volatility instead of a smooth trend. Therefore, managing risk should be the primary focus in the coming weeks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now