Market Adjustments
The futures market reduced expectations for Fed rate cuts, as seen in adjusted interest rate probabilities on Prime Market Terminal. Eurozone industrial production rose by 0.7% in November, exceeding forecasts and contributing to annual output growth of 2.5%.
Traders are now focusing on upcoming Eurozone inflation data and US Industrial Production figures for further direction. Federal Reserve officials expressed varying views on monetary policy, affecting market expectations.
EUR/USD experienced bearish momentum, with a brief dip to 1.1593. Future movements hinge on surpassing the 1.1600 level, with potential support at the 200-day SMA of 1.1582 and resistance around 1.1700.
The US Dollar’s strength is the dominant theme, driven by a resilient American labor market and better-than-expected factory activity. This positive data is forcing us to scale back expectations for Federal Reserve interest rate cuts in 2026. The market has quickly repriced from 52 to 46 basis points of easing, showing a clear shift in sentiment.
This view is strengthened by recent inflation data from the fourth quarter of 2025, which saw the core Consumer Price Index (CPI) remain stubbornly above 3.0%. This persistence makes the cautious tone from Fed officials understandable and gives credibility to the idea that policy will remain restrictive for longer than we previously thought. Consequently, the dollar’s yield advantage over the euro is likely to widen in the coming weeks.
European Market Focus
On the other side of the pair, the Euro is failing to find support despite decent industrial output figures. The market’s focus remains squarely on the European Central Bank’s potential path to cutting rates, especially as inflation in the Eurozone showed signs of cooling faster than in the US during late 2025. Upcoming inflation reports from Germany and Italy will be critical; any softness will only reinforce the Euro’s weakness.
For derivative traders, this environment suggests that buying put options on the EUR/USD is a direct way to position for a continued decline. The break below the key 1.1600 level opens the door to targeting the 200-day moving average around 1.1582, and potentially the 1.1500 mark. These options offer a defined-risk way to capitalize on the bearish momentum.
However, we must be prepared for short-term reversals, particularly around the upcoming European inflation data. A surprisingly high inflation print could cause a sharp upward squeeze. Traders holding short positions could consider buying cheap, out-of-the-money call options with a strike price above 1.1700 as a hedge against an unexpected rally.
When we look back at the 2021-2022 period from our perspective in 2025, we saw a similar dynamic where aggressive Fed policy diverged from the ECB, leading to a significant drop in the EUR/USD. The current setup, where the Fed is holding firm while the ECB appears more dovish, mirrors that historical precedent. This suggests the path of least resistance for the pair remains to the downside.
