EUR/USD Rally
The EUR/USD is climbing, trading above 1.1750 as a result of strong Eurozone industrial production data. This analysis precedes the release of US manufacturing data and speeches from Federal Reserve officials scheduled for later.
Eurostat reported a boost in factory output growth to 0.8% in November compared to 0.2% in October, surpassing expectations. Year-on-year, this represented a 2% increase, reflecting improved manufacturing strength in the region.
EUR/USD has gained nearly 2% over three weeks as the market anticipates possible US Federal Reserve rate cuts. The potential for Jerome Powell’s replacement as Chair with someone more dovish is curbing the dollar’s upward movements.
The cautious sentiment persists with traders awaiting the US Nonfarm Payrolls and Consumer Price Index data due this week. ECB’s monetary policy decision is also expected.
China’s industrial production slowed in November while retail consumption hit a near two-year low. China’s property sector concerns are resurfacing, particularly around state-backed developer China Vanke’s financial difficulties.
The NY Empire State Manufacturing Index is likely to decline to 10.6 in December from 18.7. Fed officials are set to discuss monetary policy, providing further direction for markets.
Outlook for the Euro
The recent rally in EUR/USD above 1.1750 is primarily driven by surprisingly strong industrial output from the Eurozone, which grew 0.8% in November against much lower expectations. This strength in Europe contrasts sharply with the outlook for the US dollar, which is being held back by bets on future Federal Reserve rate cuts. We are now consolidating these gains ahead of a very busy week.
The core of this trade is the widening policy gap between the European Central Bank and the Federal Reserve. With the ECB’s main rate holding firm and officials hinting a hike could be next, the Fed is facing pressure to ease policy sometime in 2026. This fundamental divergence is what has propelled the pair up by nearly 2% over the last three weeks and remains the dominant theme.
This week is all about US data, which will either confirm or challenge the market’s dovish Fed narrative. We are watching Tuesday’s delayed Nonfarm Payrolls reports, which followed a recent government data reporting snag, and Thursday’s Consumer Price Index. After inflation remained sticky around 3% for much of 2025, any sign of it cooling would solidify expectations for a Fed rate cut and likely push EUR/USD higher.
Given the major event risk from both US data and the ECB meeting this Thursday, we expect a significant increase in short-term volatility. This is a good environment to consider options strategies, as implied volatility is likely to rise heading into the announcements. Buying straddles or strangles on EUR/USD could be a way to profit from a large price move in either direction, regardless of the data’s outcome.
Despite the bullish trend, technical indicators suggest the rally might be overextended, with the MACD on the 4-hour chart hinting at a potential pullback. Therefore, hedging long positions seems prudent. We could consider buying some out-of-the-money puts with a strike price below the immediate support level around 1.1720 to protect against a surprisingly strong US data release.
We have seen this movie before, just in reverse, when looking back at the mid-2010s. During that period, the policy divergence of an easing ECB and a tightening Fed caused a massive, multi-year trend in the US dollar’s favor. The current setup suggests the potential for a similarly powerful, sustained move, but this time supporting the euro.
