The gap between the two central banks‘ main rates is expected to close as a result of the possibility of three complete 25 basis-point Fed rate cuts by year’s end and the assumption that the ECB would not make any further cuts.
Euro Surges Against Dollar
As traders braced for this week’s interest-rate decrease by the Federal Reserve, which would solidify its divergent trajectory from the European Central Bank, the euro pushed closer to its best level in four years.
Tuesday saw the common currency rise as much as 0.5% to $1.1818, its highest level since July 1. In 2025, it is up about 14%, setting a record for the highest nine-month performance.
Options indicate that a break over the July high of $1.1829 would be the highest level since September 2021 and might pave the way for a run to the much anticipated $1.20 level.
Central Bank Rate Outlook
The gap between the two central banks‘ main rates is expected to close as a result of the possibility of three complete 25 basis-point Fed rate cuts by year’s end and the assumption that the ECB would not make any further cuts.
A wall of military and infrastructure spending in Europe is anticipated to drive growth and stoke inflation, keeping the ECB on hold — or ultimately compelling it to increase rates — while the US is leaning toward easing as its job market cools. Higher rates often help a country’s currency.
In a note, Kit Juckes, director of FX strategy at Societe Generale SA, said that “for the time being, relative growth expectations, relative rates, and the broader market backdrop are all on the euro‘s side.” According to him, the likelihood of a rise to $1.20 this month has increased, and long bets on the euro are not as common as previously believed.
Euro Options Market Surge
A measure of emotion and positioning, one-week risk reversals, reached their highest level in a month, indicating a consistent increase in demand for options that provide the right to purchase the euro since the ECB concluded its easing.
More than two-thirds of euro-dollar options sold on Monday were optimistic bets, with a considerable interest for strikes over $1.20, according to data from the Depository Trust & Clearing Corporation.
Hedge Funds Turn Bullish
For FX traders familiar with the movements who requested not to be named because they are not allowed to talk publicly, hedge funds that had previously sought bullish exposure via sophisticated structures are moving toward basic bets on gains, a sign of increased confidence.
Additionally, Morgan Stanley analysts say that tactical dollar positioning is neutral before the Fed’s announcement. If officials confirm market forecasts on three cuts this year, it might indicate that the euro has leeway to continue its surge.