The Euro has retracted to 1.1585 after reaching a high of 1.1730 earlier. Eurostat data shows an unexpected rise in inflation in September. Meanwhile, the US Dollar is under pressure due to trade tensions with China and expectations of potential Federal Reserve rate cuts.

EUR/USD is trading at 1.1685 ahead of the US session, after pulling back from its peaks. Although the pair is on course for a weekly gain of 0.6% against a weaker US Dollar, the focus is now on the US Industrial Production report and a speech by St. Louis Fed President, Alberto Musalem.

Challenges For The US Dollar

The US Dollar is facing challenges from potential rate cuts and ongoing trade tensions. Fed Governor Christopher Waller supports an October rate cut, while Stephen Miran echoes the need for aggressive measures. Eurozone data indicates a 0.1% monthly inflation growth in September, with yearly inflation rising to 2.2%.

ECB officials suggest the end of the rate-cutting cycle is near. The Euro was the strongest against the US Dollar, with the latter on track for its worst week in months. Trade tensions, Fed rate cut signals, and delayed government funding weigh heavily on the US Dollar.

EUR/USD’s earlier pullback reached a support level around 1.1690. Confirmation beyond daily highs could pave the way for significant gains, with a possible move towards the October 1 and September 23 highs. The Federal Reserve’s Industrial Production report is awaited, with a consensus of 0.1% growth expected. Alberto G. Musalem, President and CEO of the Federal Reserve Bank of St. Louis, is scheduled to release a speech soon.

We are seeing a clear divergence in central bank policy that favors the Euro over the US Dollar. The European Central Bank is signaling an end to its rate-cutting cycle, giving the Euro a solid foundation. This is happening at the same time the US Federal Reserve appears ready to cut rates again, creating significant headwinds for the Dollar.

The data supports this view, with Eurozone inflation for September coming in hotter than expected at a 2.2% annual pace. The core inflation rate was even revised up to 2.4%, its highest reading since April. This provides a strong reason for the ECB to hold off on further easing, reinforcing the Euro’s strength.

Trading Strategies And Market Outlook

On the other side, the US Dollar is weighed down by expectations of more Fed rate cuts and ongoing trade tensions. We saw Fed Governor Waller openly favor another cut this month, while the Fed’s recent Beige Book warned of a slowing economy. Looking back to the economic strength of 2023, where US GDP growth was a robust 4.9% in the third quarter, the current talk of weakening consumer spending marks a significant shift.

For derivative traders, this suggests a bullish stance on the EUR/USD pair in the weeks ahead. We should consider buying call options with strike prices above the recent 1.1730 high, targeting levels like 1.1780 or even 1.1820. This strategy allows us to profit from expected upside movement while capping our potential losses to the premium paid.

However, we must be mindful of the short-term pullback, as the pair was overbought on some indicators before retreating. Today’s US Industrial Production report is a key event; a figure below the 0.1% consensus would reinforce the weak Dollar narrative. A surprise to the upside, however, could trigger a deeper correction toward the 1.1665 support level.

We will also be listening carefully to the speech from St. Louis Fed President Alberto Musalem later today. Any comments confirming the dovish outlook will likely send EUR/USD higher. A surprisingly hawkish tone could provide a temporary boost to the Dollar, offering a better entry point for long positions.

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