EUR/USD has appreciated for the second day, trading above 1.1870. The Sentix Index in the Eurozone suggests an improving economic outlook, aided by positive risk sentiment and a weakening US Dollar.
Fed Expectations and Eurozone Sentiment
The Dollar’s decline is tied to expectations that the Federal Reserve might reduce interest rates later, with the Euro gaining on positive Eurozone sentiment data. The landslide victory of Japan’s Prime Minister has also impacted currency dynamics, boosting the Yen.
ECB policymakers, including President Christine Lagarde, will deliver speeches, though they are unlikely to alter their steady monetary policy stance. The US Federal Reserve speakers might show divergence within the central bank’s monetary policy committee.
On Monday, the Euro strengthened against major currencies, with a 0.44% gain against the US Dollar. The US Dollar’s weaknesses are further emphasised by increased market odds of a Fed rate cut in the coming months.
Recent US economic indicators, including underwhelming employment figures, have pushed rate cut expectations higher. Market focus remains on upcoming key US economic data releases, including the Nonfarm Payrolls report and the Consumer Price Index.
EUR/USD showed bullish momentum, breaking above technical support levels, with key support at 1.1815 and further targets near 1.1954. Bulls are eyeing the zone around 1.1895, sufficient to cap previous declines.
European and American Economic Data Divergence
The EUR/USD is showing strength, trading above 1.1870 as we start the week. This move is driven by a belief that the Federal Reserve will cut interest rates while the European Central Bank holds steady. This growing difference in policy is the main reason we see the euro gaining against a weaker dollar.
To make this view more credible, we can see that last week’s US jobs report for January showed only 95,000 new jobs, far below the expected 180,000, which has fueled bets on a Fed rate cut. In contrast, Eurozone inflation data from two weeks ago remained sticky at 2.9%, making it difficult for the ECB to consider easing its policy. This data reinforces the divergence that is currently moving the market.
For those looking at options, the upward momentum suggests buying call options with a strike price around 1.1900 or 1.1950. However, we have seen 1-month implied volatility on EUR/USD rise from 6.5% to 8.0% over the last week ahead of major data releases. This means options are more expensive, reflecting the market’s uncertainty.
Given the higher cost of options, a bull call spread could be a more prudent strategy for the coming weeks. This would involve buying a call at a lower strike, like 1.1850, and selling another at a higher strike, such as 1.1950. This approach limits the initial cost while still profiting from a continued, steady rise in the pair.
Looking back at 2025, we saw the dollar begin to lose the momentum it had from the aggressive rate hikes of previous years. The current market feels like a continuation of that pivot, where weak US data is now directly translating into expectations for rate cuts. We must trade with the understanding that this new easing cycle may be starting.
This week is critical, with US Retail Sales on Tuesday, the delayed Nonfarm Payrolls report on Wednesday, and the CPI inflation reading on Friday. Any surprisingly strong US economic data could quickly reverse the dollar’s recent weakness. Traders should therefore be prepared for a potential sharp pullback if these numbers beat expectations.
Today’s speeches from Fed and ECB officials will set the immediate tone. We expect Fed Governors Miran and Waller to sound dovish, supporting the case for lower rates, which would further boost EUR/USD. Any hawkish surprise from them or from ECB President Lagarde could cause significant intraday volatility.
