Euro hedging costs on U.S. assets are rapidly decreasing, boosting the EUR/USD as the Fed easing cycle nears. The pair should stay supported around 1.1630/40 and may test 1.1700–1.1730.
The cost for eurozone bond investors to hedge their U.S. risks has dropped to 1.82% per annum, down from 2.45% in July. This is crucial for a bond investor aiming for an extra 150 basis points by investing in U.S. markets. These costs are predicted to decrease further with Fed rate cuts. Such dollar sales from the eurozone are expected to drive EUR/USD higher in 2026.
Eurozone Calendar Updates
The eurozone calendar is light today, featuring an ECB speech about global imbalances. This will discuss the international role of the euro and encourage reforms to benefit from the shift to a multipolar world.
Current conditions suggest a bias towards EUR/USD trading between 1.1700 and 1.1730, maintaining support around 1.1630/40. Economic indicators are also poised for shifts, with the Michigan Consumer Sentiment Index likely increasing to 52. Statistics Canada is set to reveal a rise in November’s Unemployment Rate to 7%. These elements, among others, may impact the trading environment.
The sharp drop in costs for hedging U.S. assets is a major tailwind for the euro. For a European investor, the annual cost to hedge dollar exposure has fallen to 1.82%, a significant decrease from the 2.45% we saw back in July 2025. This makes buying U.S. bonds and selling the dollar forward more attractive, which should continue to push the EUR/USD pair higher.
This trend is directly tied to expectations that the U.S. Federal Reserve will begin cutting interest rates in the coming months. Current market data, like the CME FedWatch Tool, shows a greater than 70% probability of a first rate cut by March 2026. As this Fed easing cycle gets closer, we expect hedging costs to fall even further, increasing flows out of the dollar and into the euro.
Strategies For Derivative Traders
For derivative traders, this suggests positioning for upward movement in EUR/USD. Buying call options with strike prices around the 1.1700 or 1.1730 levels could be an effective way to capitalize on a potential breakout. These options offer a defined risk while providing exposure to the expected rally into early 2026.
Given the strong support identified around the 1.1630/40 area, selling cash-secured puts with a strike price slightly below this level, perhaps at 1.1600, is another viable strategy. With one-month implied volatility for the pair currently subdued near 5.8%, selling options allows traders to collect premium while the bullish thesis plays out. This approach benefits if the pair moves up, sideways, or only slightly down.
Upcoming economic data will be critical to watch, as it could accelerate this trend. The preliminary Michigan Consumer Sentiment index for December is expected to rise slightly, but any weakness would reinforce the case for Fed cuts. Looking back, the softer Non-Farm Payrolls report we saw for November 2025 already added to the view that the U.S. economy is cooling.
Meanwhile, commentary from the European Central Bank reinforces a longer-term positive outlook for the single currency. We hear officials like Philip Lane discussing the euro’s international role in a changing global landscape. This provides a supportive background narrative for holding a bullish view on the euro against the dollar.
