Insights 
VT 
EUR/USD stabilised, breaking a four-day losing trend, after reaching a two-month low. The Euro traded around 1.1621, rising by 0.50% as the US Dollar softened. Despite this rebound, the currency pair faced its steepest weekly decline since July, driven by political challenges in France.
French Prime Minister Sébastien Lecornu’s resignation exacerbated concerns over political instability. President Macron must appoint a new prime minister soon and pass the budget before year-end. Snap elections are unlikely now but could happen if coalition talks fail.
Us Government Shutdown Continues
In the US, the government shutdown extended to its tenth day without resolution. The Senate plans no vote until Tuesday, raising concerns about economic repercussions if the standoff continues into mid-October. This shutdown has postponed the September Non-Farm Payrolls report, but the Bureau of Labor Statistics will release the September Consumer Price Index by October 24.
Earlier, the University of Michigan Consumer Sentiment Index showed slight improvement at 55.0, despite being just below September’s reading. Inflation expectations changed minimally, with a modest decline in the 1-year outlook to 4.6%. The US Dollar showed varied performance against major currencies, strengthening notably against the Australian Dollar by 1.02%.
With EUR/USD trying to find its footing around 1.1620, the immediate focus is on political headlines from both sides of the Atlantic. The pair’s direction next week will be heavily influenced by whether French President Macron can appoint a stable prime minister by this evening and if US lawmakers make any progress on ending the shutdown. We see this as a period of heightened event risk, where headline-driven swings are more likely than a clear trend.
The political turmoil in France creates a clear binary risk for the Euro, and we should position for volatility. We saw similar Euro weakness driven by political uncertainty during the 2017 French election cycle, which resolved with a strong rally once the market-friendly outcome was confirmed. A solid appointment by Macron could trigger a relief rally, making short-term call options on the Euro an interesting play to capture potential upside.
Shutdown and Its Economic Impact
On the US side, the government shutdown is now the primary driver of dollar softness. Looking back, the Congressional Budget Office estimated the 35-day shutdown in 2018-2019 cost the US economy around $11 billion, so the market is rightly concerned about the economic drag if this continues. Until a deal is reached, it will be difficult for the US dollar to find sustained strength against its peers.
This environment of dual uncertainty has pushed the VIX index, a key measure of market fear, above 25 this week, signaling broad risk aversion. Given the opposing forces acting on the EUR/USD, traders might consider strategies like straddles or strangles, which profit from a significant price move in either direction. Implied volatility for one-month options is likely to remain elevated until the French political situation and the US shutdown are resolved.
The most important date on our calendar now is October 24, when the September CPI inflation data will be released. This will land just before the Federal Reserve’s meeting and will be the most critical data point for their decision-making process. A higher-than-expected inflation reading could easily overshadow shutdown concerns and send the dollar surging on renewed rate hike expectations.
Recent commitment of traders (CFTC) data shows that large speculators have already been reducing their net-long Euro positions over the past couple of weeks. This suggests caution is already being priced in and that the market is trimming its bullish bets. This positioning could mean that any positive resolution from France would lead to a sharp rebound as traders rush to re-establish their positions.
