Insights 
VT 
The EUR/USD has risen to near 1.1630, as the US Dollar retraced following a meeting between US President Trump and China’s Xi Jinping. This movement came despite no trade deal emerging from the meeting. The US Dollar Index, which tracks the dollar against six major currencies, has fallen to near 99.00. The US Dollar was weakest against the New Zealand Dollar.
The European Central Bank (ECB) is expected to keep interest rates unchanged for the fourth consecutive time. As inflation pressures in the Eurozone economy remain stable near the 2% target, the Deposit Facility rate is likely to stay at 2%. The ECB will announce its monetary policy at 13:15 GMT, while the Eurozone Q3 GDP and German HICP data will be released at 10:00 GMT and 13:00 GMT, respectively.
Federal Reserve Cuts Interest Rates
The Federal Reserve has cut interest rates by 25 basis points to 3.75%-4.00% as a “risk management cut.” This follows a reduction in tariffs on Chinese imports from 57% to 47%. Meanwhile, the Euro is firm as the ECB maintains its strategy to support the Eurozone’s price stability around inflation targets, with monetary policy decisions made at meetings held eight times a year.
The divergence between the Federal Reserve and the European Central Bank is becoming clearer, and we should position for continued US Dollar weakness against the Euro. The Fed just cut rates to a 3.75%-4.00% range, while the ECB is expected to hold its rate steady at 2.00% today. This widening interest rate differential in favor of the Euro makes holding the single currency more attractive.
The US Dollar Index has slipped to near 99.00, reflecting the market’s reaction to the Fed’s dovish move and the de-escalation in the China trade dispute. Although the reduction of tariffs to 47% is a positive step for global trade, it removes a key reason for investors to hold the US Dollar as a safe haven. We’ve seen this sentiment before, looking back at how the dollar weakened in late 2023 when the market first began pricing in Fed rate cuts for 2024.
Euro Gains Support
With the ECB holding rates firm, the Euro is gaining support, which is a significant change from the aggressive hiking cycle we saw end back in 2024. Today’s Eurozone Q3 GDP and German inflation data are now the main events to watch. Strong numbers would reinforce the ECB’s steady policy stance and could push EUR/USD higher, as current economic forecasts from the IMF have only projected modest 1.4% growth for the Euro area this year.
For traders, this environment suggests buying call options on the EUR/USD pair to capitalize on further upside potential. A move towards the 1.1700 level seems possible if today’s European data comes in strong. Options provide a way to participate in the rally while defining and limiting our maximum risk.
A more conservative strategy would be to implement a bull call spread. This involves buying a call option at a lower strike price and selling another at a higher strike price to reduce the initial cost of the trade. This is a good way to profit from a gradual and steady rise in the EUR/USD, which aligns with the current fundamental picture.
However, we must remain focused on the incoming data, as any unexpected weakness in the Eurozone GDP or German inflation could quickly reverse the pair’s gains. A softer-than-expected inflation reading, for instance, might bring forward expectations for an ECB rate cut, erasing the Euro’s current yield advantage. This makes setting clear profit targets and stop-loss levels on any position essential.
