Recalling The Dollar’s Strength
We recall the dollar’s strength back in 2025, which pushed EUR/USD below the 1.170 mark. That move was largely driven by the easing of tariff risks following the Greenland framework deal. At the time, we saw a clear path for the pair to test 1.1600 as the dollar regained traction.
However, the dynamics driving the pair now in January 2026 are shifting away from the dollar’s dominance. Recent data shows Eurozone inflation unexpectedly rising to 2.5%, while the latest US CPI has moderated to 2.8%. This inflation differential is starting to challenge the narrative of persistent dollar strength that we saw last year.
This has led markets to price in a more hawkish European Central Bank, with futures now indicating a 60% probability of a rate hike by the second quarter. Conversely, expectations for a Federal Reserve rate cut in the latter half of 2026 have solidified. The policy divergence we anticipated is now clearly favoring the euro.
Positioning For Further Upside
For the coming weeks, this suggests positioning for further upside in EUR/USD through derivatives. Buying call options with strikes around 1.1950 and 1.2000 offers a defined-risk way to capture potential gains. More cautious traders might consider bull call spreads to lower the upfront premium cost.
The narrative of an improved eurozone macro outlook, which we saw as a possibility back then, is now materializing. Last week’s flash Eurozone PMI beat expectations at 51.2, confirming economic expansion and supporting the single currency. This contrasts with the softer US economic data we have been seeing.
