Insights 
VT 
The EUR/USD stabilised after reaching a two-week low, as the ECB chose not to alter interest rates. The ECB reiterated a cautious, data-dependent approach, adjusting policy based on incoming data with no firm future rate commitments.
The ECB maintained rates with the Deposit Facility, Main Refinancing, and Marginal Lending Rates at 2.00%, 2.15%, and 2.40%. The Eurozone economy continued growing, supported by a strong labour market, yet geopolitical tensions pose risks.
Traders Await Insights
ECB’s statement included no fixed long-term rate path, keeping focus on future inflation and economic data. Traders await further insights from ECB President Christine Lagarde.
Meanwhile, the US Dollar benefits from the Federal Reserve’s recent 25-basis-point rate cut. Fed Chair Jerome Powell’s remarks offered no assurance of further cuts, strengthening the USD.
The US Dollar Index held at 99.55, after peaking since August 1, driven by optimistic US-China trade relations. The USD showed the strongest gains against the Japanese Yen, with varied performance against other major currencies.
A currency heat map displays percentage changes among major currencies, illustrating the USD’s relative strength across pairs.
Cautious Economic Approach
We are seeing the EUR/USD hover near 1.0850 after the European Central Bank confirmed it will hold its deposit rate at 3.00%. The bank is sticking to its familiar data-dependent approach, giving us no clear hints about the path forward into 2026. This lack of a pre-commitment keeps short-term option traders guessing.
Policymakers are right to be cautious, as the latest flash estimate showed Eurozone inflation is proving sticky at 2.4%, while Q3 growth was a sluggish 0.1%. Looking back at the aggressive hiking cycle of 2022-2023, it’s clear the lagged effects are now weighing on the economy. This backdrop suggests selling rallies in the Euro might be the prevailing strategy for now.
The real story is the growing policy divergence with the Federal Reserve, which seems to be laying the groundwork for a potential rate cut in early 2026. Recent US data, with core PCE inflation falling to 2.2% and monthly job gains averaging just 110,000, supports this dovish tilt. This contrasts sharply with the ECB’s firm on-hold stance.
This policy disconnect suggests we should prepare for an increase in currency volatility over the coming weeks. One-month implied volatility for EUR/USD has already ticked up to 7.5%, up from a low of 5.8% seen over the summer. Buying options, such as straddles or strangles, could be a prudent way to position for a significant price break.
Given the Fed’s softening tone, the path of least resistance for EUR/USD appears to be to the upside. We could consider buying bullish call spreads to position for a move towards the 1.1000 level, while defining our risk. This strategy allows us to capitalize on a potential dollar decline heading into the final meetings of the year.
