During Friday’s North American session, the EUR/USD remained steady, closing November and the week higher by 0.81% and 0.59%, respectively. Currently trading at 1.1601, the pair may see further gains as the Federal Reserve is expected to cut rates in December, with the probability standing at 87%.

Speculation of a Fed rate cut has grown despite mixed data from the US, where producer inflation stabilised, and unemployment claims decreased. Meanwhile, Eurozone data showed stronger economic indicators, particularly with the Harmonized Index of Consumer Prices (HICP) surpassing expectations and nearing 3%.

Eurozone Economic Indicators

Notably, Germany and Spain’s HICP rose, and France’s GDP exceeded forecasts, further boosting the Euro. The European Central Bank hints its easing cycle has ended, suggesting a favourable outlook for the EUR/USD.

A potential breakout above key technical levels could see the EUR/USD advance. However, a drop below 1.1550 may risk a decline towards 1.1500. Next week’s US economic calendar includes significant data releases, which could influence market movements.

The Euro remains strong against several major currencies, particularly the Japanese Yen, driven by the weak US Dollar. The currency’s resilience is underscored by recent economic data and ECB policy signals, counterbalancing the mixed outlook in the US.

Policy Divergence Between Fed and ECB

With the market pricing an 87% chance of a Federal Reserve rate cut in December, the policy divergence between a dovish Fed and a stabilizing European Central Bank is clear. The ECB has signaled an end to its easing, especially as recent inflation data from Germany and Spain has come in hotter than expected. This environment supports a bullish stance on the EUR/USD pair in the weeks ahead.

To capitalize on this, we should consider buying EUR/USD call options with expirations in late December 2025 or January 2026. Looking at the latest Eurozone core HICP figures which held firm at 2.9%, compared to the US Core PCE which we saw fall to 2.8% in October, the fundamental case is strong. Strikes around 1.1650 or even 1.1700 offer good potential for profit if the expected policy moves materialize.

For a more conservative approach that lowers the upfront cost, a bull call spread is an effective strategy. We could buy a call option with a strike price just above the current market, like 1.1625, while simultaneously selling a call with a higher strike, such as 1.1725. This defines our risk to the net premium paid while still capturing the upside from a moderate rally.

The primary risk to this outlook is the upcoming slate of US economic data, particularly next week’s ISM and employment reports. Stronger-than-expected numbers could cause markets to rapidly reduce the odds of a December rate cut, leading to a sharp reversal in the dollar’s weakness. We must therefore manage position sizes carefully ahead of these key data releases.

We can look back to the 2022-2023 period for a historical parallel, where the Fed’s aggressive rate hiking cycle outpaced the ECB and led to significant dollar strength. The situation we see unfolding in late 2025 appears to be the inverse of that scenario. This suggests the current trend of dollar weakness against the euro may be sustained for some time.

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