The EUR/USD exchange rate may increase as expectations build for a Federal Reserve rate cut in December, aided by key market dynamics. The recent decline in European Natural Gas prices to their lowest since early 2024 has made the Euro more competitive, although cold weather could potentially tighten the market and negate these gains.
Expectations for Federal Reserve Rate Cut
Danske Bank anticipates that the Federal Reserve will lower interest rates, potentially pushing the EUR/USD higher. Natural Gas markets have unexpectedly contributed to this support, as European prices have dropped considerably, narrowing the spread with US prices to the tightest level since 2021. This shift benefits European manufacturers by improving their competitiveness, while US energy exporters might see reduced revenue.
Despite the current favourable conditions for EUR/USD, the situation remains precarious due to low European gas storages for this time of year. A sudden drop in temperatures could lead to increased demand, depleting inventories and potentially causing a rebound in European gas prices, which would tighten the market conditions.
With the Federal Reserve widely expected to cut interest rates at its meeting later this month, we believe structural drivers could now push EUR/USD higher. The latest US CPI data for November 2025 showed inflation cooling to 2.8%, leading futures markets to price in an 85% probability of a 25-basis point cut on December 17th. This has already helped the currency pair climb toward a six-month high of 1.0950.
The Euro is also finding support from an unexpected source in the natural gas market. European natural gas prices have fallen to their lowest levels since early 2024, and the price difference compared to US gas is the narrowest it has been since 2021. This development improves the competitiveness of European manufacturers while reducing revenues for US energy exporters, creating a positive backdrop for EUR/USD.
Risks to the Positive Outlook
The primary risk to this positive outlook is a sudden cold snap, as European gas storage facilities are currently reported at 88% full, which is below the five-year average of 92% for early December. For traders, this suggests buying EUR/USD call options to capture the upside from the expected Fed cut is a viable strategy. However, purchasing out-of-the-money put options could serve as a prudent hedge against a sharp reversal caused by a shift in weather.
We must watch weather models carefully, as some are now showing an increased probability of a polar vortex event over Northern Europe before the end of the year. We remember how the energy price spike in 2022 drove the Euro below parity, highlighting the currency’s sensitivity to sudden energy shocks. Therefore, call options on Dutch TTF gas futures could also be considered as a direct hedge against this specific risk to long Euro positions.
