The EUR/USD is trading near multi-week highs due to a weaker US Dollar and cautious Federal Reserve outlook. The Euro has strengthened following last week’s 25 basis point rate cut by the Fed, with the pair trading around 1.1760, its highest since early October.
The US Dollar Index is near 98.18, recently approaching a two-month low. Remarks from Fed Governor Stephen Miran have applied downward pressure on the Dollar, advocating for a larger rate cut and suggesting current policy is overly restrictive. Miran noted shelter inflation’s link to past supply-demand issues, indicating a faster easing pace could be appropriate.
US Economic Indicators
The US New York Empire State Manufacturing Index fell sharply to -3.9 in December, down from 18.7 in November, missing the expected 10.6. A slew of US economic data releases is anticipated this week, potentially influencing future Fed policy, particularly focusing on the delayed Nonfarm Payrolls and Consumer Price Index reports.
In contrast, the Eurozone’s economic calendar is quieter initially, with Eurozone Industrial Production rising 0.8% in October, exceeding expectations. Attention turns to upcoming surveys and the European Central Bank’s interest rate decision, with the ECB projected to hold rates steady, favouring the EUR/USD’s upward movement.
Following last week’s 25 basis point rate cut from the Federal Reserve, the first major policy shift we’ve seen in over a year, the bias for the US Dollar is now clearly to the downside. A key Fed official is already arguing that policy is “unnecessarily tight,” which suggests to us that further rate cuts are being actively considered. This environment should continue to provide support for the EUR/USD pair in the near term.
With the pair trading near 1.1760, we should consider strategies that profit from continued upward movement while managing risk around this week’s key data releases. Buying call options or implementing bull call spreads on EUR/USD would be a direct way to position for a stronger Euro. The upcoming US payrolls and inflation reports are major catalysts that could easily push the pair through the 1.1800 level.
The recent sharp fall in the New York Empire State Manufacturing Index to -3.9 is a significant warning sign for the US economy, especially when we compare it to the positive readings we saw for most of 2024. This confirms the Fed’s decision to begin easing policy. The US Dollar Index (DXY) reflects this reality, hovering near 98.18 after peaking above 106 back in the third quarter of 2024.
Market Implications
Meanwhile, the European Central Bank is not in the same position and is expected to hold interest rates steady this week. We are seeing Eurozone core inflation remain stubborn, with the latest data from November showing a 2.7% year-over-year increase, keeping pressure on the ECB to not ease its policy. This growing divergence between a cutting Fed and a holding ECB is the primary driver for a stronger EUR/USD.
We must prepare for increased price swings, as implied volatility for EUR/USD is likely to rise ahead of the major US data releases. One-month implied volatility, which sat near a low of 5.8% last month, has already climbed back toward 7.2% and will probably spike higher. Buying options now, before that expected increase in volatility, could prove to be a more cost-effective strategy.
If the US jobs and inflation data this week come in softer than expected, it will confirm the market’s dovish Fed outlook and could accelerate the EUR/USD rally. In that scenario, we would look to position for a move toward the 1.2000 psychological level. This could involve using longer-dated call options expiring in January or February 2026 to capture a more sustained trend.
