The Impact of the US Government Shutdown

The downward movement of the EUR/USD pair might be curtailed by the pressure on the US Dollar due to the current US government shutdown. This shutdown has persisted for 19 days, marking the third-longest lapse in US history and showing no resolution after repeated Senate voting failures.

Additionally, easing US-China trade tensions could further impact the US Dollar. US President Donald Trump has expressed a desire for China to resume its previous soybean purchases, signalling potential tariff negotiations. A meeting is expected between US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng, possibly leading to future discussions between Trump and China’s President Xi.

The Eurozone’s Economic Challenges

Looking back, the S&P downgrade of France’s credit rating was a clear turning point for the Euro. At that time, we saw EUR/USD struggle around the 1.1660 mark, and the concerns over France’s budget have not disappeared. The latest projections released by the French Ministry of Finance this month show the budget deficit for 2025 is still expected to be 4.9% of GDP, well above the EU’s 3% limit and keeping pressure on the single currency.

These concerns are now compounded by fresh signs of economic sluggishness across the bloc. Germany’s most recent IFO Business Climate index, released just last week, unexpectedly dipped to 89.5, marking the third consecutive monthly decline and signaling continued weakness in manufacturing. This trend makes it highly unlikely the European Central Bank will consider raising rates, capping any potential upside for the Euro.

From our perspective in late 2025, the US federal government shutdown mentioned in the original analysis, which became the second-longest in history at 35 days, ultimately had a temporary impact on the dollar. The US economy has since proven more resilient, with the latest September jobs report showing the addition of 195,000 non-farm payrolls. Furthermore, core inflation remains persistent at 3.5%, reinforcing the view that the Federal Reserve will hold interest rates higher for longer than the ECB.

The old trade tensions involving agricultural products have since evolved. Today, we are more concerned with ongoing disputes over technology and semiconductor export controls, which creates a different kind of market uncertainty. This environment tends to favor the US Dollar as a safe-haven currency over the Euro.

Given the fundamental divergence between a fragile Eurozone and a resilient US economy, we see continued downward pressure on the EUR/USD. Derivative traders should consider buying put options with strike prices around the 1.1300 level expiring in the next 45 to 60 days. This strategy allows for profiting from a potential decline while strictly defining the maximum risk involved.

Market Volatility and Strategies

The implied volatility in the pair has recently ticked up to 7.8%, up from a low of 6.5% last month, suggesting the market is beginning to price in a larger move. This makes option strategies more expensive but also more relevant as protection against further downside. We believe establishing bearish positions now is prudent before the market fully prices in the weakness we anticipate for the Euro.

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