EUR/USD is trading cautiously near a two-week low of 1.1570. The US Dollar remains strong due to the cooling of Federal Reserve dovish bets and improved US-China trade relations.

The US Dollar Index is near a three-month high of 99.70. This week, the dollar saw the most strength against the British Pound, with a 1.31% increase.

Fed and ECB Monetary Policies

Fed Chairman Jerome Powell noted that additional monetary easing in December is uncertain, following a 25-basis point rate cut. In contrast, the European Central Bank kept its Deposit Facility rate at 2%, aligning with the inflation target.

On Friday, attention will be on the Eurozone’s preliminary Harmonized Index of Consumer Prices. The EUR/USD trend appears bearish, with the pair remaining below the 20-day EMA at 1.1630.

If the Relative Strength Index drops below 40.00, further bearish momentum may occur. A decline could see the pair hit lows of 1.1547 and 1.1528, while an upside could target July’s high of 1.1830 if it surpasses 1.1728.

The outlook for the EUR/USD appears bearish, with the pair struggling near 1.1570 due to a strengthening US dollar. The Federal Reserve is signaling it may not cut interest rates again in December, which supports the dollar’s value. This makes betting against the Euro an attractive short-term strategy.

Recent Economic Indicators

We just saw the October non-farm payrolls report come in much hotter than expected, adding 290,000 jobs, while wage growth also ticked up. This strong economic data gives the Fed more reason to hold rates steady, reinforcing the dollar’s current strength. It reduces the likelihood of further monetary easing that traders had previously priced in.

Given this bearish momentum, we should consider buying put options on the EUR/USD. This strategy would profit if the pair continues to fall below key support levels like the 1.1547 low seen on October 30. Look for options expiring in the next several weeks to capitalize on this trend.

On the other side of the pair, we are watching the upcoming Eurozone Harmonized Index of Consumer Prices (HICP) very closely. Consensus expectations are for core inflation to moderate slightly to 2.5% year-over-year. A print at or below this level would confirm that price pressures are contained.

A soft inflation number would give the European Central Bank little reason to change its steady course, keeping its deposit rate at a comparatively low 2%. This widening gap between the Fed’s policy and the ECB’s inaction will likely continue to weigh on the Euro. The lack of any strong signals from the ECB leaves the currency vulnerable.

This growing policy divergence between the Fed and ECB is a pattern we saw play out through much of 2022 and 2023, a period which historically favored the dollar. We see a similar setup forming now, where US economic resilience contrasts with a more cautious European outlook.

Therefore, we believe traders should anticipate further downside for the EUR/USD. Positioning for a move towards the August lows around 1.1528 seems prudent. Using options to define risk or shorting futures contracts are viable ways to express this view in the coming weeks.

Create your live VT Markets account and start trading now.