In the early Asian session, the EUR/USD pair is trading around 1.1775, supported by expectations of future US Federal Reserve rate cuts. There is limited expectation for a European Central Bank rate cut in early 2026, keeping the Euro buoyant compared to the US Dollar.
The Federal Reserve recently cut the federal funds rate by 25 basis points to a target range of 3.50%-3.75% in December, totalling 75 basis points of cuts in 2025. The prospect of additional rate cuts next year is putting pressure on the US dollar.
Potential New Fed Chair
A potential new Federal Reserve Chair, expected to have a dovish stance, might add to the US dollar’s decline. Meanwhile, the ECB has kept rates steady and emphasises a data-dependent approach to future rate changes.
The money markets predict a low chance of a 25 basis point ECB rate cut by February 2026. Current indicators suggest the ECB rate cut cycle may end soon, which could positively impact the Euro.
Trade balance figures and economic indicators such as GDP and employment data play a role in the Euro’s valuation. A strong economy and positive trade balance tend to support the Euro’s strength against other currencies.
With the EUR/USD trading firmly above 1.1750, we see this as a clear signal of continued US Dollar weakness heading into the new year. This trend is driven by the market’s strong belief that the Federal Reserve will keep cutting interest rates in early 2026. The divergence in monetary policy between a dovish Fed and a more hesitant European Central Bank is the primary factor supporting the Euro.
US Market Trends and Predictions
Looking back at 2025, the Fed already delivered 75 basis points in rate cuts as the US labor market showed signs of slowing. Recent data confirmed this trend, with the November Non-Farm Payrolls report showing job growth of only 130,000 and the unemployment rate ticking up to 4.1%. This cooling, combined with Core PCE inflation moderating to 2.9%, gives the Fed plenty of reason to continue easing policy in the coming months.
Across the Atlantic, the situation is different, which supports the Euro’s relative strength. The latest Eurozone HICP inflation figure for November 2025 was a stubborn 3.2%, well above the ECB’s target. Therefore, money markets are correct to price in only a minimal chance of an ECB rate cut in February, reinforcing the central bank’s hold-steady message.
For traders, this suggests a strategy of buying EUR/USD call options to capitalize on the expected upward trend with limited risk. Given the anticipation of Fed action in the first quarter, we believe options with March 2026 expiries could be well-positioned to profit from this policy divergence. The upcoming nomination of a new Fed Chair in May 2026 only adds to the expectation of a more politically influenced, low-rate environment for the dollar.
This situation feels like a reverse of what we saw in the mid-2010s, when ECB easing against a tightening Fed caused a massive slide in the Euro. Now, the roles are flipped, which could support a sustained rally for the EUR/USD pair. We will be watching today’s US Pending Home Sales data for any near-term disruption to this narrative.
