Insights 
VT 
The EUR/USD extended its gains for the fifth consecutive day, reaching a new weekly high near 1.1670, as the US Dollar weakened. Expectations were high for the Federal Reserve to announce an interest rate cut on Wednesday amidst ongoing trade optimism between the US and China.
The US Dollar Index, measuring the Dollar against six major currencies, dropped near a weekly low of 98.50. The Consumer Price Index data for September showed a moderate increase in headline and core inflation by 0.3% and 0.2% respectively over the month.
Trade Optimism Between US And China
Optimism over a trade agreement between the US and China might bolster the Dollar, with President Trump expressing confidence in a deal soon. In Europe, attention shifted to upcoming German inflation data and the Eurozone’s third-quarter GDP, which are expected to show moderate economic growth.
The Eurozone’s Harmonized Index of Consumer Prices (HICP), along with other economic indicators, plays a critical role in evaluating the Euro’s value. Should inflation exceed the European Central Bank’s target, it may lead to interest rate adjustments, impacting the currency’s attractiveness. The balance of trade also remains a vital economic indicator for Euro valuation.
The EUR/USD is climbing towards 1.1670 this week, marking its fifth straight day of gains. This momentum is driven by a weakening US Dollar as we head into the Federal Reserve’s policy announcement tomorrow. The market is pricing in a high probability of another interest rate cut.
This expectation for a Fed cut is supported by recent economic figures, showing a continued cooling in the US economy. For instance, job growth has moderated from the stronger pace we saw last year, and the latest September CPI reading of 0.3% monthly is not high enough to deter the Fed from easing. We remember how annual inflation was running above 8% back in 2022, so the current environment gives the central bank room to act.
Expectations For Central Bank Decisions
With a key central bank decision hours away, we should anticipate a significant spike in short-term volatility. Implied volatility on EUR/USD options has already ticked up, a pattern historically seen before Fed announcements. This presents an opportunity to use strategies like straddles to trade the magnitude of the post-announcement move, regardless of the direction.
We must also watch for key data from Europe this Thursday, including German inflation and the Eurozone’s Q3 GDP. The consensus is for modest 0.1% quarterly growth, similar to the stagnant figures we observed through parts of 2024. A surprisingly strong number from Europe could accelerate the EUR/USD rally, especially if the Fed delivers a dovish message.
Beyond the immediate central bank news, the improving risk sentiment, fueled by optimism over a potential trade understanding between the US and China, is also weighing on the safe-haven dollar. The S&P 500 has gained nearly 1.5% this week, showing a clear appetite for risk among investors. A continuation of this trend would likely add further upward pressure on the euro.
