EUR/USD was little changed on Friday, trading near 1.1763 after dipping to 1.1743, and it remained on track for a weekly loss. Price action was mixed after US GDP data came in weak while inflation readings were firm.
US Q4 2025 GDP rose at an annualised 1.4%, down from 4.4% in the prior quarter and below the 3.0% forecast. The GDP Price Index was unchanged at 3.7%.
Inflation Data Keeps Fed Outlook Cloudy
Core PCE inflation rose 0.4% month on month in December, up from 0.2% and above the 0.3% forecast. Core PCE was 3.0% year on year, up from 2.8% and above the 2.9% forecast.
Headline PCE rose 0.4% month on month, up from 0.2% and above the 0.3% forecast. The annual rate edged up to 2.9% from 2.8%.
The US Dollar Index hovered near 98.00 after falling to about 97.80 earlier. Fed minutes pointed to ongoing inflation concerns, while markets still priced two rate cuts, with June seen as the first move via CME FedWatch.
S&P Global PMI data showed Composite at 52.3 (from 53.0), Manufacturing at 51.2 (from 52.4), and Services at 52.3 (from 52.7). Traders awaited the University of Michigan Consumer Sentiment and inflation expectations data later in the session.
Given the conflicting data from late last month, we see the market struggling for a clear path forward. The slowdown in Q4 2025 economic growth to just 1.4% suggests a cooling economy, yet the firmer December 2025 Core PCE inflation at 3.0% points to persistent price pressures. This has left the EUR/USD pair in a tight range, creating a classic setup of uncertainty for the weeks ahead.
Volatility Strategies Come Into Focus
This view has been reinforced by more recent data, which continues to paint a mixed picture for the US economy. January’s jobs report, released two weeks ago, showed a robust addition of 225,000 jobs, but wage growth unexpectedly slowed to a 0.2% monthly pace. This data did little to resolve the core conflict between a potentially weakening consumer and sticky inflation, keeping the Federal Reserve in a difficult position.
As a result, implied volatility in EUR/USD options has been slowly creeping up from its recent lows. The market is clearly anticipating a potential breakout as we await the next major inflation print. We are positioning for this by considering long volatility strategies, such as purchasing straddles, which would profit from a significant move in either direction without needing to predict the catalyst.
Historically, periods like this, reminiscent of the market in 2023, often end with a sharp repricing event once a clearer trend emerges. We remember how markets had to quickly adjust their rate-cut expectations back then when inflation proved more resilient than anticipated. Therefore, holding positions that benefit from a spike in volatility seems prudent, even if it means paying a slightly higher premium for options right now.
For those of us who believe this gridlock will continue, selling options premium presents an alternative strategy. Establishing iron condors with strikes set outside the recent 1.1700-1.1850 range could yield profits if the pair remains range-bound for another few weeks. However, this strategy requires careful risk management in case of a sudden directional shift driven by unexpected data or Fed commentary.
