Insights 
VT 
The Euro remains steady against the US Dollar, trading around 1.1745, influenced by weaker US data and a broadly weaker US Dollar. US ISM Services PMI dropped to 50 in September, from 52 in August, while the Eurozone’s Composite PMI increased to 51.2 from 51.
Political gridlock has contributed to US Dollar pressure, with the US government shutdown affecting sentiment. The US Dollar Index is around 97.75, hovering above its weekly low. Mixed US data shows a cooling of services activity and labour demand, with ISM Services PMI falling and the Employment Index marking a fourth month of contraction.
Eurozone Economic Indicators
The S&P Global Services PMI slightly decreased to 54.2, indicating a mild loss of momentum. Within the Eurozone, HCOB Composite PMI rose to 51.2, aligning with forecasts, as the Services PMI increased to 51.3 from 50.5 in August. Euro growth remains modest amidst ongoing disinflation.
Chicago Fed President Austan Goolsbee expressed caution over policy decisions during the US shutdown. Meanwhile, ECB President Christine Lagarde noted unexpected resilience in the Euro area, emphasizing the bank’s commitment to meeting its mandate. The Euro was strongest against the Japanese Yen, changing by 0.35%.
The ongoing US government shutdown is the main event driving dollar weakness, with the US Dollar Index now hovering near 97.75. We are seeing uncertainty rise as key data, like the monthly Non-Farm Payrolls report, is now delayed. This makes it very difficult for the Federal Reserve and for us to get a clear picture of the economy.
The divergence in economic momentum is becoming clearer, with the US ISM Services index falling to the 50.0 stagnation mark. Meanwhile, the Eurozone’s Composite PMI has edged up to 51.2, showing more resilience than we had expected. This fundamental split continues to support a stronger Euro against the Dollar for now.
Central Bank Perspectives
We are also seeing a split in central bank sentiment, with Fed officials sounding wary while the European Central Bank expresses confidence. Looking at the futures market, we see that pricing now indicates less than a 10% chance of another US rate hike by the end of the year. The ECB, however, seems comfortable holding its policy steady.
Given this backdrop, we should consider strategies that benefit from a rising EUR/USD in the coming weeks. Buying call options on the Euro provides a way to capture potential upside beyond the current 1.1750 resistance level. This gives us a defined-risk position to profit if the US political and economic issues persist.
We should also prepare for increased price swings as long as the shutdown continues. One-month implied volatility for EUR/USD has already climbed to 8.5%, its highest level since the market stress we saw in early 2024. This uncertainty can be traded using straddles, which would profit from a large price move in either direction.
We remember the 35-day government shutdown back in 2018-2019, which shows these situations can drag on longer than many expect. However, any sudden political resolution would likely cause a sharp dollar rally. For this reason, using options with a fixed downside is more prudent than holding leveraged futures positions.
