The EUR/USD rebounded as the European Central Bank (ECB) maintained interest rates, aligning with expectations. In contrast, softening US inflation exerted pressure on the US Dollar, providing support to the Euro.
The ECB, keeping borrowing costs unchanged for a fourth straight meeting, held rates steady at 2.00%, 2.15%, and 2.40% for the Deposit Facility, Main Refinancing Operations, and Marginal Lending Facility, respectively. The Bank stressed its approach remains data-driven, with inflation stabilising at 2% as its aim.
Inflation Projections
Future decisions will consider economic data, price dynamics, and policy effectiveness without pre-committing to a rate path. ECB forecasts see inflation aligning with the 2% target by 2028, amid a revised higher 2026 outlook due to slower cooling of services inflation.
The growth projection has improved since September, with anticipated Eurozone growth of 1.4% in 2025, 1.2% in 2026, and maintaining 1.4% in 2027 and 2028. The US Dollar faced pressure following US inflation reports that fell short of expectations, contributing to speculation of Federal Reserve easing.
The US Consumer Price Index rose 2.7% in November against a 3.1% forecast. Despite inflation data, US Initial Jobless Claims at 224K underpinned the dollar slightly by surpassing an expected 225K, below the prior 237K figure.
With the European Central Bank holding its rates steady and US inflation for November coming in surprisingly low at 2.7%, the immediate path of least resistance for the EUR/USD is upward. This divergence in economic data strengthens the case for a weaker dollar against the euro as we head into the new year. Traders should view the current 1.1756 level as a potential launching point for further gains.
Market Implications
This view is reinforced by market pricing for future central bank actions. According to the CME FedWatch Tool, the probability of a Federal Reserve rate cut in the first quarter of 2026 has now jumped to over 70%, a significant increase following the latest CPI report. Conversely, the ECB’s own projections, which see Eurozone inflation at 2.1% for 2025, suggest they are in no rush to ease policy, creating a clear policy gap.
For derivative traders, this environment supports buying call options on the EUR/USD with January or February 2026 expiries to capitalize on expected upward momentum. The lower-than-expected US inflation print has likely caused a spike in short-term implied volatility, so waiting for a small dip could offer a better entry point. A bull call spread is also a viable strategy to lower the initial cost while still profiting from a rise in the pair.
Historically, we have seen similar periods of policy divergence lead to sustained currency trends, as was the case in 2018 when the Fed’s dovish pivot weakened the dollar over the subsequent months. The current Eurozone growth outlook, upgraded to 1.4% for 2025, provides a supportive domestic backdrop for the euro that was absent in previous cycles. This suggests the fundamental support for a stronger euro is more robust this time around.
Looking ahead, we must watch ECB President Lagarde’s comments closely for any hint of dovishness that could temper this rally. The upcoming US Personal Consumption Expenditures (PCE) Price Index will also be critical, as it is the Fed’s preferred inflation measure. Any deviation from the soft CPI data could quickly reverse sentiment and unwind these bullish positions.
