EUR/USD rose above 1.1740, climbing by over 0.50% as the dollar slipped despite strong US economic data. This movement was influenced by improved risk appetite, with US President Trump dropping tariff threats on Europe, supporting the euro. At the time of reporting, EUR/USD was trading at 1.1743, having bounced back from a daily low of 1.1670.
Strong Economic Indicators
Strong Q3 GDP figures and steady inflation in the US reduced expectations for a Federal Reserve rate cut in January. Market bets showed a 95% probability of the Fed maintaining rates, with reduced forecasts for future rate cuts. In Europe, ECB meeting minutes revealed a consensus that underlying inflation remains aligned with the 2% target.
The EU economic schedule will feature Flash PMIs for Germany, France, and the bloc, alongside ECB President Christine Lagarde’s comments. In the US, focus will be on the S&P Global Flash PMIs and consumer sentiment data. Euro displayed varying percentage changes against other major currencies this week, showing strength against the Japanese Yen.
The ECB, situated in Frankfurt, controls Eurozone monetary policy, mainly maintaining price stability through interest rate decisions. Economic data such as GDP, inflation rates, and trade balances are crucial for evaluating the euro’s strength. Positive trade balances, indicating more exports than imports, typically strengthen the currency.
We recall this time last year when the removal of tariff threats pushed EUR/USD above 1.1740. That optimism, however, appears to have been a high-water mark, as the pair has since trended significantly lower. The focus has now shifted from resolving trade disputes to the growing divergence between central bank policies.
Changing Economic Outlook
Looking back, markets were right to expect Fed rate cuts in 2025, but the economic resilience shown in the US was underestimated. With the latest US Core PCE data for December 2025 holding firm at 2.9% year-over-year, the strong case for further aggressive rate cuts has diminished. This contrasts sharply with the mood a year ago when the market was pricing in over 40 basis points of easing.
The situation in Europe has also changed, as the ECB’s confidence from early 2025 has faded. Recent Eurostat data showed Eurozone GDP growth was nearly stagnant in the fourth quarter of 2025, and flash PMI figures for January have suggested a weak start to the new year. As a result, money markets are now pricing in a 70% chance of an ECB rate cut by June, putting sustained pressure on the Euro.
This policy divergence suggests we should prepare for an increase in volatility. Implied volatility in EUR/USD options is still moderate, presenting an opportunity to buy straddles or strangles to profit from a larger-than-expected price move in either direction over the next month. The current environment is far less certain than the clear risk-on sentiment we saw a year ago.
For traders with a directional bias, the fundamental picture favors a weaker Euro against the Dollar. We should consider buying put options or establishing bearish put spreads to target a move below 1.0800 in the coming weeks. The technical targets of 1.1800 and above, which seemed plausible this time last year, are no longer relevant in the current macroeconomic climate.
