Insights 
VT 
The Euro dipped below 1.1700 against the US Dollar, nearing one-month lows at 1.1645. France’s political and fiscal challenges are causing caution for the Euro. Today’s focus is on speeches from ECB and Fed officials, including Christine Lagarde.
Euro declined for a second day, trading near 1.1665, as France’s crisis grabs attention before Fed and ECB announcements. Dominique Macron’s credibility suffered after a governmental shakeup, increasing calls for snap elections.
Central Bank Perspectives
ECB officials have expressed concerns over geopolitical risks and weak growth. Christine Lagarde mentioned that disinflation has ended, and potential rate cuts remain an option. Expectations are for further insights from Lagarde and Joachim Nagel regarding monetary policy.
US Fed policymakers, such as Michelle Bowman and Stephen Miran, could influence the US Dollar’s trajectory. Investors worry about France’s political void amid its excessive fiscal deficit, which exceeds EU limits. Rating agencies have cautioned about potential downgrades of France’s debt.
German Factory Orders data failed to inspire markets as orders decreased by 0.8% in August. ECB and Fed officials’ upcoming addresses might guide future monetary actions. EUR/USD faces continued pressure near the monthly lows of 1.1645, with technical indicators suggesting limited upward movements.
Given the current market, we see the Euro weakening against the US Dollar primarily because of the political and fiscal crisis unfolding in France. This instability is the key driver pushing the pair towards its monthly low of 1.1645. Investors are clearly nervous about the leadership vacuum and the lack of a clear path forward for the Eurozone’s second-largest economy.
The risk is becoming more visible in the bond market, where the spread between French and German 10-year government bonds has widened to over 65 basis points this week. This is a significant jump and signals that investors are demanding a higher premium to hold French debt. With France’s budget deficit projected to exceed 5.5% of GDP in 2025, concerns about a sovereign debt downgrade are becoming very real.
Strategy and Market Impact
This situation puts the European Central Bank in a difficult position, with officials suggesting another rate cut could still be on the table to support weak growth. In contrast, the US Federal Reserve is expected to maintain its current policy, creating a clear divergence that favors a stronger US Dollar. This policy gap is likely to widen if US inflation data remains stubborn, as it did in the reports for July and August of 2025.
The poor economic data from Germany, with factory orders unexpectedly falling in August 2025, reinforces the view of a struggling Eurozone economy. This is consistent with other recent indicators, such as the ZEW Economic Sentiment survey, which dipped back into negative territory last month, showing growing pessimism among investors. We believe this broader economic weakness will continue to weigh on the Euro for the foreseeable future.
For our strategy in the coming weeks, we should consider buying put options on the EUR/USD. This allows us to profit from a fall in the exchange rate while limiting our potential loss to the premium paid. A confirmed break below the key 1.1645 support level would be our trigger to enter these positions, targeting the lower levels around 1.1610 and 1.1575.
We should look at options with expiration dates in late October and November 2025 to give the trade enough time to play out amidst the expected volatility from central bank speeches and political news. To manage risk, we can use the descending trendline around 1.1730 as a point to reconsider our bearish stance. Any move above that level would suggest the immediate downward pressure is easing.
This Euro weakness is likely a broad theme, not just isolated to its pairing with the Dollar. We should also analyze opportunities to short the Euro against other currencies that have a more stable outlook, such as the Swiss Franc. The flight to safety in times of European uncertainty has historically strengthened the Franc, suggesting a trade shorting EUR/CHF could also be profitable.
