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US Expectations Impacting Euro
The Euro climbed to a two-week high above 1.1630 against the US Dollar. This increase comes despite a contraction in Eurozone manufacturing activity, as the US Dollar weakens on anticipation of US Federal Reserve interest rate cuts.
US manufacturing data and Federal Reserve Chair Jerome Powell’s participation in a panel discussion are key focus areas. The Euro’s rise is supported by the expectation of a Fed interest rate cut by 25 basis points next week.
US ISM Manufacturing PMI – a significant indicator of business activity in the US – is expected to drop to 48.6 from 48.7. Analysts will closely watch the Prices Paid sub-index and the employment gauge.
The Euro strengthens despite weak Eurozone manufacturing data; the final HCOB Manufacturing PMI fell to 49.6 in November. Currency movements show Euro strengthening against the New Zealand Dollar, while the upcoming economic calendar includes Eurozone HICP and US employment data.
Technically, EUR/USD breaks through the 1.1615 resistance area, with additional resistance expected at the 1.1660 – 1.1670 zone. Immediate support levels are at 1.1550, with further support anticipated at 1.1500.
US Dollar Weakness Drives Trends
The US Dollar is clearly on the defensive as the market fully expects a Federal Reserve interest rate cut next week. This has pushed the EUR/USD to two-week highs, and we see this trend continuing in the near term. The primary driver is not Euro strength but broad-based Dollar weakness.
Considering this momentum, we believe buying call options on the EUR/USD is the most direct strategy. A strike price around 1.1650 with an expiration in late January 2026 would allow us to profit from a continued move towards the 1.1730 resistance level. This approach offers a defined risk while capturing the expected upside volatility.
The case for a weaker dollar was just strengthened, as the latest ISM Manufacturing PMI for November was released, coming in at 48.1. This figure is below the 48.6 consensus and last month’s 48.7, signaling a faster-than-expected contraction in US factory activity. This disappointing data will likely fuel further bets on the Fed’s upcoming rate cut.
All eyes will now turn to the Personal Consumption Expenditures (PCE) price index data due out this Friday. The most recent data from October showed Core PCE inflation at 2.8% year-over-year, and we anticipate this week’s print for November will show a further decline to 2.7% or even 2.6%. A soft inflation reading would give the Fed a clear green light to ease monetary policy.
We remember a similar dynamic in late 2023 when the dollar weakened considerably as the market began pricing in the end of the Fed’s hiking cycle. The current sentiment feels much the same, as traders are now positioning for a series of cuts extending into 2026. This historical precedent supports the view that the path of least resistance for the dollar is lower.
It is important to note that the Euro itself is not showing fundamental strength, with its own manufacturing PMI recently revised down to a five-month low. However, in foreign exchange, everything is relative, and the market is solely focused on the US interest rate story. This makes the long EUR/USD position a clean bet against the dollar.
While our primary view is bullish on EUR/USD, we must watch the upcoming Eurozone inflation data this Tuesday. A surprisingly low Harmonized Index of Consumer Prices (HICP) could briefly temper the Euro’s rise. Traders could consider buying cheap, out-of-the-money put options as a short-term hedge against any unexpected data from Europe.
