Euro Heads for Highest in Four Years With $1.20 Level in Sight

The euro edged toward its strongest level in four years as traders prepared for an interest-rate cut from the Federal Reserve this week that will cement its diverging trajectory from the European Central Bank.

The common currency climbed to its highest since July 3 on Tuesday, gaining as much as 0.3% to $1.1791. It’s up almost 14% in 2025, set for the best nine-month performance on record.

A break above July’s $1.1829 high would mark the strongest level since September 2021 and options suggest that could set the stage for a run at the closely watched level of .

Demand is being supported by expectations the ECB won’t cut rates further at a time when the Fed is seen as a loosening cycle. The prospect of three full 25 basis-point Fed rate reductions by year-end is bolstering the allure of the European common currency.

One-week risk reversals, a gauge of positioning and sentiment, show steadily rising demand for options that grant the right to buy the euro since the ECB signaled it is done easing. Data from the Depository Trust & Clearing Corporation backed that up: more than two-thirds of euro-dollar options traded Monday were bullish wagers, with notable appetite for strikes above $1.20.

Hedge funds that had previously sought bullish exposure through complex structures are shifting toward simple bets on gains, a sign of growing conviction, according to FX traders familiar with the flows who asked not to be identified because they aren’t authorized to speak publicly.

And according to strategists at Morgan Stanley, tactical dollar positioning is neutral ahead of the Fed decision. That could mean there’s still room for the euro to extend its rally should policymakers validate market bets on three cuts this year.