EUR/USD continues to decline, trading near 1.1710 during Asian hours on Monday. The pair weakens as the US Dollar gains strength from safe-haven demand, prompted by increased geopolitical risks after the US captured Venezuelan President Nicolas Maduro.
President Trump announced a large-scale strike on Venezuela without congressional approval, aiming to maintain order until a stable transition occurs. The US Dollar’s ascent may face limits owing to anticipated Federal Reserve rate cuts in 2026, and Trump is expected to appoint a new Fed chair, potentially influencing a shift towards lower interest rates.
Euro Support Factors
The Euro could see support against the Dollar due to divergent monetary policies between the European Central Bank and the Federal Reserve. The ECB kept rates steady in December 2025, indicating they might remain unchanged, while ECB President Christine Lagarde cited uncertainty as a challenge for forward guidance.
When financial markets are “risk-on,” investors pursue high-risk assets, boosting commodity-linked currencies like the Australian and Canadian Dollars. In “risk-off” scenarios, safer assets such as bonds and currencies like the US Dollar, Japanese Yen, and Swiss Franc are favoured, as investors seek security amid uncertainty. Some currencies thrive in commodity-driven economies during risk-on periods, whereas major currencies like the US Dollar strengthen during risk-off phases.
The US-led action in Venezuela is driving a clear “risk-off” move, sending capital into safe havens like the US Dollar. This has pushed the EUR/USD pair down toward the 1.1700 level, a significant technical area we have been watching since it acted as support late last year. We are seeing this risk aversion reflected across markets, with the CBOE Volatility Index (VIX) jumping over 35% to trade above 26 for the first time in months.
Dollar Strength and Market Strategies
Given the immediate uncertainty, the dollar is likely to remain strong in the coming days, possibly pushing EUR/USD further down. The spike in WTI crude oil prices to over $95 a barrel will further complicate the picture, adding to inflationary pressures while global growth fears rise. For now, traders should consider strategies that benefit from this volatility and potential for further euro weakness, such as buying near-term put options.
However, we should not ignore the underlying fundamentals that could reverse this trend quickly. The market is still pricing in two Federal Reserve interest rate cuts for 2026, with fed funds futures indicating an over 80% probability of the first cut happening by the March meeting. This expectation is a significant headwind for the dollar once the current geopolitical tensions begin to fade.
This contrasts with the European Central Bank, which we saw in December 2025 signal a firm intention to keep rates on hold for an extended period. This growing policy divergence between a dovish Fed and a neutral ECB should provide strong support for the euro in the medium term. Therefore, any excessive dips below 1.1700 could present opportunities to position for a rebound later in the first quarter.
