The EUR/USD pair has increased for the second day, reaching the 1.1830-1.1835 range due to US Dollar (USD) selling. This movement follows Friday’s rebound from a two-week low of 1.1765. The shift in spot prices is also influenced by the easing concerns over Middle East tension after US-Iran discussions. Additionally, the divergence in interest rate paths between the Federal Reserve and European Central Bank suggests further potential gains for the pair.
Interest Rate Divergence
Market participants expect the US Federal Reserve to execute two rate cuts of 25 basis points in 2026. This expectation is reinforced by weak US labour market data. Conversely, the European Central Bank is easing without further rate adjustments due to stable European growth. However, traders are waiting for the delayed release of the US Nonfarm Payrolls report on Wednesday, impacting the dollar and the EUR/USD pair. The current economic conditions are positive for the euro, with no major European or US macro data expected before the NFP release.
The USD shows varied strength against major currencies today with its most substantial gain against the British Pound. The heat map provided illustrates these currency percentage changes. The base currency is selected from the left column, with the quote currency from the top row.
The EUR/USD is pushing against the 1.1835 resistance level, driven by a softer US dollar. This upward momentum has been building since last week’s rebound from the 1.1765 area. All eyes are now on the delayed US jobs report scheduled for this Wednesday, which will be the next major catalyst for the currency pair.
We see a clear divergence in central bank policy that supports a higher EUR/USD. The market has fully priced in at least two Fed rate cuts for 2026, especially after last month’s Core PCE inflation came in at a two-year low of 2.1%. In contrast, the Eurozone’s flash Composite PMI for January surprised to the upside at 51.2, suggesting the ECB has no reason to cut rates soon.
Trading Strategy
This situation is a notable shift from what we observed through much of 2025. Back then, the ECB was actively cutting rates to stimulate the economy, which kept the pair trading below the 1.1500 level for several months. Now, with the ECB on hold and the Fed looking to ease, the path of least resistance appears to be upward.
Given the upcoming NFP report on Wednesday, buying outright spot positions carries significant event risk. A more prudent approach for the next few days would be to use options, such as buying call spreads on EUR/USD, to position for potential upside while capping the downside risk. Implied volatility is elevated ahead of the data release, suggesting the market is prepared for a sharp move in either direction.
Should the jobs report on Wednesday come in weaker than expected, it would reinforce the view that the Fed will cut rates this year. This could be the catalyst that breaks the 1.1835 resistance and opens the door for a move towards the 1.2000 psychological level in the coming weeks. We would then look to add to long positions on any minor dips.
