The EUR/USD pair has risen by 0.5% to 1.1814, marking its first increase above 1.1800 since July. This movement comes amid negative sentiment towards the dollar, as the market awaits the Federal Open Market Committee meeting decision.
This sentiment also impacts other currency pairs, with USD/CHF down 0.4% to 0.7910 and GBP/USD up 0.3% to 1.3640. Many traders are overlooking large option expiries, indicating a robust interest in EUR/USD.
Dollar Struggles Amid Fed Expectations
The dollar’s struggle is linked to expectations of the Federal Reserve’s actions tomorrow. The current market conditions have already put pressure on the greenback, raising questions about the Fed’s forthcoming decision.
Uncertainty prevails as the market speculates whether the Fed will meet expectations or introduce a hawkish tone. Such decisions could influence the already-growing sentiment observed this week.
With the EUR/USD breaking above 1.1800, we are seeing a significant test of levels not touched since the middle of 2024. This move is being driven by broad dollar weakness ahead of tomorrow’s key FOMC decision. The market is clearly pricing in a dovish stance from the Federal Reserve.
This expectation is supported by recent data we’ve seen. The latest US CPI figures from August 2025 came in at a manageable 2.5%, well within the Fed’s comfort zone, while recent retail sales have missed expectations for two consecutive months. In contrast, Eurozone inflation remains stickier, with the latest reading at 2.8%, giving the European Central Bank less reason to turn dovish.
Implications for Derivative Traders
For us derivative traders, this setup feels risky as the long Euro trade is becoming crowded. Looking at the latest CFTC data, speculative net-long positions on the Euro are at their highest level in over 18 months. This suggests that a hawkish surprise from the Fed could trigger a sharp reversal as crowded positions are unwound.
We have to remember the market’s reaction to Fed commentary back in 2023, when a hawkish tone was maintained despite some signs of cooling growth, causing a significant dollar rally. The question for us now is if history will repeat itself. Any hint from the Fed that they are still more concerned about inflation than growth could upset this dollar downturn.
Given the uncertainty, implied volatility on EUR/USD options has risen ahead of the announcement. This makes buying protective puts expensive but perhaps necessary for those holding long positions. Alternatively, we could consider call spreads to cheapen the cost of betting on further upside while defining our risk if the Fed surprises the market.
