Quick overview

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The euro pushed closer to its highest level in four years as investors braced for this week’s interest-rate cut by the Federal Reserve, which would solidify its divergent path from the European Central Bank. The common currency gained up to 0.3 percent on Tuesday, reaching $1.1791, its highest level since July 3.

It has the best nine-month performance on record, gaining about 14% in 2025. Options indicate that a break above July’s high of $1.1829 would be the strongest level since September 2021 and could pave the way for a run at the highly anticipated level of $1.20.

Demand is being bolstered by expectations that the ECB won’t lower rates any further as the Fed is perceived to be ready to begin a loosening cycle.  The Fed is expected to lower interest rates by a total of 25 basis points in 2025, which is making the euro more appealing.

The demand for options that allow the purchase of the Euro is increasing steadily. This trend is reflected in one-week risk reversals, which serve as a gauge of market sentiment and positioning, particularly since the European Central Bank (ECB) indicated that it will halt further easing.

Supporting this observation is data from the Depository Trust & Clearing Corporation, which shows that more than two-thirds of Euro-dollar options traded on Monday were bullish bets, with significant interest in strike prices above $1.20.

 

Foreign exchange traders, who prefer to remain anonymous as they are not authorized to speak publicly, noted that hedge funds that previously pursued bullish exposure through complex strategies are now shifting toward simpler bets on Euro gains. This change suggests a growing conviction among these traders regarding the Euro’s potential for appreciation.