Insights 
VT 
The eurozone calendar is clear until Friday’s PMI, so movements in the EUR/USD rate will mostly rely on US credit market sentiment. The EUR/USD is currently aligned with its short-term fair value of 1.167, despite recent increases.
Last week’s moderate undervaluation of the euro was exacerbated by concerns about US lending conditions and dovish Fed expectations. The EUR:USD two-year swap rate gap had narrowed to 104 basis points but widened again to 110 basis points after Friday’s risk reassessment. It remains 4-5 basis points tighter than a week ago and 7-8 basis points tighter than at the start of October.
Current Economic Conditions
French politics have somewhat stabilised, supporting the euro; however, uncertainties persist. S&P downgraded France from AA- to A+ last Friday, despite proposals for deficit reduction, and the postponement of pension reform adds complexity. France’s government fragility complicates full euro recovery predictions, as budget discussions are expected to intensify soon.
This week, attention remains on the US. If credit sentiment worsens further, EUR/USD could potentially reach 1.180. FXStreet’s Insights Team, comprising journalists and analysts, reviews market observations from numerous experts for their reports.
Our focus for the next few weeks should remain on the United States, as signs of stress in the US credit market are the main driver for EUR/USD. Any further souring of credit sentiment there will likely weaken the dollar as the market prices in a more dovish Federal Reserve. This could push the currency pair towards the 1.180 level.
We are seeing evidence of this strain in recent data. For example, the Markit CDX North American Investment Grade Index, a key measure of credit risk, has widened by over 15 basis points in the past two weeks. This reflects growing concern and directly correlates with the market now pricing in a higher probability of a Fed rate cut in the first quarter of 2026.
Potential Trading Strategies
Given this outlook, traders could consider buying EUR/USD call options to gain upside exposure while limiting risk. A call option with a 1.1750 strike price and a mid-November expiry would be a strategic way to position for a potential move higher. This approach captures the upside if US credit fears intensify, but protects against a sudden reversal.
However, we must remember the lingering risks in France, which could cap the euro’s strength. S&P’s unexpected downgrade of French debt on Friday, October 17, serves as a fresh reminder of the country’s fiscal challenges. The upcoming budget discussions remain a significant hurdle and could create headwinds for the euro.
We saw a similar dynamic play out back in the spring of 2023 when fears around US regional banks caused a rapid repricing of Fed expectations. During that period, the EUR/USD rallied from around 1.05 to over 1.10 in just a few weeks as the dollar weakened. The current setup is showing parallels to that event, suggesting a similar outcome is possible.
For now, the key indicator to watch is the two-year swap rate spread between the euro and the US dollar. That gap has already tightened this month, and if it continues to narrow from its current level of 110 basis points, it will confirm the trend of a weakening dollar. A move back towards 100 basis points would be a strong bullish signal for our view.
