EUR/USD has risen above 1.1750, trading around 1.1760 during Friday’s Asian session. Market participants are watching Germany’s Manufacturing PMI data closely.
The Euro is benefiting from policy differences between the ECB, which has maintained steady rates, and the US Federal Reserve, which is expected to cut rates by 2026. A new Fed chair could influence lower US interest rates.
Probability Of Unchanged Rates
The FedWatch tool indicates an 85.1% probability of unchanged rates at the upcoming Fed meeting, with the likelihood of a rate cut dropping to 14.9%. The Fed lowered rates by 25 bps in December, setting the target range at 3.50%–3.75%.
The Euro is the official currency of 20 EU countries. In 2022, it represented 31% of global forex transactions with an average daily turnover exceeding $2.2 trillion. EUR/USD is the most traded currency pair, making up about 30% of all transactions.
The European Central Bank influences the Euro through interest rates, aiming primarily at price stability. Inflation exceeding the ECB’s 2% target may prompt rate hikes. Economic indicators like GDP and PMIs, along with trade balance data, play a role in determining the Euro’s value.
Given the widening policy gap between a steady European Central Bank and a dovish Federal Reserve, we see the path of least resistance for EUR/USD as upward in the near term. The primary trade is to position for further Euro strength against the US Dollar. Derivative traders should consider buying EUR/USD call options or implementing bull call spreads to capitalize on this expected move.
Market Anticipation
The market’s anticipation of two more Fed rate cuts in 2026 is the key driver of dollar weakness. However, we must note that the December 2025 jobs report showed a stronger-than-expected gain of 216,000 non-farm payrolls, which could complicate the timing of the Fed’s next move. This suggests that while the direction is down for US rates, the path may be volatile.
On the other side of the pair, the ECB’s hesitation to cut rates is supported by recent inflation figures. Eurozone inflation, as measured by the HICP, unexpectedly accelerated to 2.9% in December 2025, reinforcing the central bank’s cautious stance. This keeps Euro-denominated assets relatively attractive from a yield perspective.
While the interest rate outlook favors the Euro, we are also monitoring signs of economic weakness in the Eurozone’s largest economy. Germany’s Manufacturing PMI has been in contraction territory, with a recent reading of 43.3 in late 2025. Another weak print could temper enthusiasm for the Euro and cap the rally in the EUR/USD pair.
This policy divergence is not new, and we can look to history as a guide for how such trends can play out. The period from 2014 to 2015 saw a similar, though inverse, divergence that led to a sustained trend in the currency pair. This precedent suggests the current environment could support a multi-month upward trajectory for EUR/USD.
