Insights 
VT 
USD Stabilisation Factors
There are several reasons for lower EUR/USD levels, though risks are not evenly distributed. The chance of Fed independence, tariff issues, and the US shutdown not becoming problems could lead to USD stabilisation soon.
However, if US trade policy continues impacting through the year and the Fed leans towards rate cuts, EUR/USD could be substantially affected. While less likely, this scenario could have significant consequences for EUR/USD levels.
Following the Fed governor’s comments on monetary policy, we have seen the US dollar regain its footing against the Euro. After flirting with the 1.08 level last week, the EUR/USD pair is now trading below 1.07. For the moment, the path of least resistance appears to be toward a stronger US dollar.
At first glance, this seems to contradict our view of a weaker dollar later next year, but lower levels were always possible in the short term. The US economy, despite slowing to a reported 1.5% annual growth rate in the third quarter of 2025, continues to outpace Europe, where the latest manufacturing PMI data still shows contraction at 47.8. As long as US inflation remains sticky above 3%, the market will assume the Federal Reserve has little reason to cut interest rates.
Considerations For Traders
There are many arguments for a lower EUR/USD, but we should not forget that the risks are balanced unevenly. A sharper-than-expected US slowdown may not be the most likely scenario, but its impact would be significant. Traders could consider selling out-of-the-money EUR/USD call options to collect premium while positioning for continued dollar stability.
However, if upcoming US jobs and retail sales data disappoint, the narrative could shift very quickly toward aggressive Fed rate cuts. We saw how rapidly the dollar weakened during the brief banking stress in early 2023 when markets suddenly anticipated a policy pivot. Just because this risk has been dormant does not mean it has disappeared.
Derivative traders should therefore use strategies that account for this uncertainty. While near-term positioning might favor the dollar, buying volatility through strategies like a EUR/USD straddle could be prudent. This would allow a trader to profit from a large price move in either direction, hedging against a sudden break from the current economic outlook.
