EUR/USD Rises on Fed Rate Cut Expectations
The Federal Reserve is expected to lower interest rates by 25 basis points, bringing rates to between 3.50% and 3.75%. The likelihood of this rate cut happening is priced at nearly 90%.
The Fed Chair’s press conference and the updated Economic Projections will be under scrutiny for future interest rate clues. Despite this, some forecast a “hawkish cut” in December, which might uplift the dollar and challenge the currency pair.
German and Eurozone Data Supports Euro
In Europe, positive data from Germany and the Eurozone supports the Euro. Germany’s Industrial Production rose 1.8% in October, surpassing expectations. Furthermore, Eurozone’s Sentix Investor Confidence improved to -6.2 in December from -7.4 in November.
With EUR/USD pushing towards 1.1650, the market is clearly betting on a Federal Reserve rate cut tomorrow. We are positioned for this announcement, but the focus for derivative traders is on the risk of a “hawkish cut.” This means the Fed could cut rates as expected but signal that this is not the start of a deep easing cycle, which would cause a sharp reversal.
We have to consider the economic data that the Fed is watching. The latest Non-Farm Payrolls report for November 2025 showed a resilient labor market, adding 195,000 jobs, while core inflation is proving sticky, hovering around 3.6%. This data does not scream for aggressive rate cuts, supporting the idea that Chair Powell may deliver a cautious message tomorrow.
Given this, we see value in strategies that account for a potential spike in the US Dollar, even if the Fed cuts rates. Buying short-dated, out-of-the-money EUR/USD put options offers a cheap way to hedge long positions or speculate on a downward move. If Powell’s tone is surprisingly firm, the pair could quickly drop back below the 1.1500 level.
Volatility and Policy Divergence Risks
This situation has echoes of the Fed’s policy pivot back in late 2018 and early 2019. Back then, markets reacted violently to subtle shifts in the central bank’s language about the future path of interest rates. We expect similar volatility, so holding a position through the announcement without a hedge is a significant risk.
Meanwhile, the stronger German industrial production numbers help support the Euro, but this is a secondary factor. The European Central Bank has shown no immediate intention of cutting rates, maintaining a policy divergence with the US. This fundamental backdrop suggests that any knee-jerk drop in the EUR/USD following the Fed meeting could present a buying opportunity for a longer-term rebound into 2026.
