The EUR/USD exchange rate’s potential rise towards 1.20 by year-end relies on a dovish approach from the Federal Reserve. However, the recent Fed meeting complicates reaching that target. Despite this, EUR/USD found support below 1.1600 overnight.

The eurozone’s third-quarter GDP data is due, with previous survey data being encouraging, although hard data disappointed over the summer. French GDP exceeded expectations at 0.5% quarter-on-quarter, compared to the predicted 0.2%. A big upside surprise is needed to impact EUR/USD, as eurozone GDP is expected at 0.1% quarterly.

European Central Bank Meeting

The European Central Bank meeting also occurs today, but President Christine Lagarde is unlikely to alter market expectations. Current market pricing slightly favours a potential rate cut within the next nine months. The short-term range for EUR/USD appears to peak at 1.1640/50, with a risk of dropping to 1.1550 following the Fed’s recent communication.

Potential downside risks could arise from the flash October CPI releases from Germany, Spain, and Belgium. These factors make for a cautious outlook on the EUR/USD exchange rate’s near-term movements.

Given the Federal Reserve’s less dovish stance last night, our view of EUR/USD reaching 1.20 by year-end is now under pressure. The interest rate differential between the US and Europe continues to be a major factor, with the Fed funds rate holding at 5.25% while the ECB’s deposit facility rate is at 3.75%. This gap makes holding dollars more attractive and will likely cap any significant euro rallies in the coming weeks.

With EUR/USD finding some support below 1.1600, traders might consider strategies that profit from a range-bound or slightly bearish market. We see the 1.1640/50 level as a firm ceiling, making the sale of call options or setting up bear call spreads at that strike price a viable approach. The downside target of 1.1550 looks increasingly probable, so purchasing puts could also be an effective way to position for this move.

Short Term Volatility

The European Central Bank meeting today is unlikely to change this dynamic, as we don’t expect any major policy shifts from President Lagarde. However, her comments could introduce short-term volatility, which traders can use to their advantage by structuring options strategies like iron condors to profit if the pair remains locked within the expected 1.1550-1.1650 range. Looking back at similar periods of policy divergence, like what we saw in 2023, the dollar typically maintained its strength for an extended period.

The latest economic data from the eurozone supports a cautious outlook on the euro. This morning’s flash report confirmed that Eurozone Q3 GDP grew by just 0.1%, highlighting the region’s sluggish economic momentum compared to the United States. Furthermore, preliminary October inflation data from Germany came in at 2.9%, which, while moderating, is still high enough to create a stagflationary headache for the ECB.

For the next few weeks, the path of least resistance for EUR/USD appears to be sideways to lower. The key takeaway is that the Fed is not providing the dovish pivot needed for a sustained euro rally. This environment suggests that selling into strength will remain the dominant strategy for the pair.

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