EUR/USD traded lower as the US Dollar gained strength after Kevin Warsh was nominated as Fed Chair. US producer-side inflation remained steady at 3.0% year-over-year in December, above the Fed’s 2% target, reinforcing a disciplined policy stance.
The Eurozone economy grew by 0.3% in Q4 2025, consistent with the previous quarter, and Germany’s GDP also increased by 0.3%. The US Dollar drew additional support from an agreement in the US Senate to advance a government funding package, which improved risk sentiment.
Core Producer Price Index Rises
Core Producer Price Index (PPI) in the US rose to 3.3% year-over-year, surpassing expectations for a decline to 2.9%. Fed officials noted the current policy rate of 3.50%–3.75% as broadly neutral and emphasised patience with monetary policy.
In currency movements, the Euro saw the most strength against the Japanese Yen. The currency heat map demonstrates percentage changes of major currencies against one another, with Euro showing relative strength compared to other major currencies.
In December, the Eurozone’s GDP rose 1.4% year-over-year, exceeding forecasts. Additionally, Germany’s annual GDP growth increased to 0.4%, outperforming market predictions. The Euro-USD dynamic remains sensitive to continued US monetary policy developments.
Given the Federal Reserve’s firm policy stance, the path of least resistance for EUR/USD appears to be to the downside. The appointment of Kevin Warsh as Fed Chair signals a disciplined approach, which we saw strengthen the dollar through January. Persistent US inflation figures from late 2025 further reduce the likelihood of near-term rate cuts, supporting continued dollar strength.
Trading Strategy For EURUSD
For the coming weeks, traders should consider buying put options on EUR/USD with strike prices below the 1.1800 level. This strategy provides a clear way to profit from expected weakness while capping potential losses. The 1.1850 mark has proven to be a significant resistance point, making it a key level to watch for failed upside attempts.
The dollar-positive narrative was reinforced when we saw the Non-Farm Payrolls report for January 2026 come in well above expectations at 215,000 jobs added. Average hourly earnings also ticked up, confirming that the tight labor market continues to fuel the price pressures seen in last year’s PPI data. This gives Fed officials like Musalem and Bostic more reason to remain patient before considering any policy easing.
In contrast, recent flash PMI figures for January 2026 from the Eurozone showed a slight softening in the services sector, slipping to 51.2 from 52.5. While Germany’s rebound in Q4 2025 was a positive development, this newer data suggests European growth may not keep pace with the U.S. This economic divergence between the two regions is a strong fundamental driver for a lower EUR/USD exchange rate.
We have seen this pattern before, where diverging monetary policies lead to sustained currency trends for many months. The last time we observed such a clear split between a hawkish Fed and a more cautious European Central Bank was in the 2014-2015 period, which resulted in a multi-month decline in the EUR/USD pair. This historical precedent suggests the current trend could have significant momentum.
While the primary outlook is bearish for EUR/USD, it is worth noting the Euro’s relative strength against other currencies, particularly the Japanese Yen. Based on the cross-currency performance we saw on Monday, establishing a long EUR/JPY position could serve as a useful hedge. This would capitalize on pronounced Yen weakness while diversifying away from direct exposure to the U.S. dollar’s dominance.
