The EUR/USD pair has dropped to around 1.1630, continuing its two-day decline. This decline aligns with a stronger US Dollar, which is gaining amid optimism that the US government shutdown could end soon.

The US Dollar Index, which compares the Greenback to six major currencies, has risen to about 98.70. The US Dollar has shown strength against the Japanese Yen, marked by a 0.24% increase.

Potential Resolution Of The Government Shutdown

This development follows comments from White House economic adviser Kevin Hassett about the potential resolution of the shutdown. Expectations also rise for a positive outcome from the meeting between US President Trump and Chinese leader Xi Jinping at the forthcoming Asia-Pacific Economic Cooperation meeting.

Investors anticipate the release of the US Consumer Price Index data for September, which is set to impact the Federal Reserve’s policy decisions. Although the US Dollar strengthens against the Euro, the Euro remains firm against other currencies with the European Central Bank likely maintaining current interest rates.

The US Dollar, the primary global currency, accounts for over 88% of the world’s foreign exchange turnover. The Federal Reserve’s monetary policies, including interest rate adjustments and quantitative easing, play a pivotal role in influencing the US Dollar’s value. Quantitative tightening, conversely, tends to bolster the Dollar’s strength.

With the EUR/USD pair now pressing down near 1.1630, we see the US Dollar’s strength as the primary driver. This move is fueled by optimism that the US government shutdown will resolve, removing a key piece of uncertainty from the market. For derivative traders, this points toward betting on continued dollar momentum against the euro in the short term.

This trend isn’t happening in a vacuum; recent data supports a stronger dollar. The latest September jobs report showed a solid addition of 210,000 payrolls, and inflation, while moderating, remains above the Fed’s target at 3.1%. In contrast, the latest Eurozone flash PMI for October just came in at a contractionary 49.5, highlighting a growing economic divergence that favors the dollar.

Trading Strategies Amid Volatility

Given the upcoming US Consumer Price Index (CPI) data, implied volatility on EUR/USD options is likely to rise. Traders could consider buying puts or establishing bear put spreads to position for a further drop, especially if inflation comes in hotter than expected. This strategy allows for defined risk while capitalizing on potential downward price movement.

We remember from the post-pandemic inflation spike of 2022 that when the Fed’s policy outlook is firmer than other central banks, the dollar can rally significantly. The current situation feels similar, as the European Central Bank has signaled no desire to raise rates further. History suggests that these policy divergences can create sustained currency trends lasting for months.

While the ECB holding rates is supportive for the Euro against other currencies, it creates a clear disadvantage against the dollar. Last month’s negative German industrial production figures reinforce the view that the ECB will remain on the sidelines. Therefore, any strength in the Euro should be viewed with skepticism until the continent’s economic data improves meaningfully.

The potential for a US-China trade consensus at the upcoming APEC meeting adds another layer to consider. A positive outcome could boost global risk appetite, which might briefly weigh on the safe-haven dollar. However, we see any resulting EUR/USD rally as an opportunity to initiate new short positions at more favorable levels, as the underlying economic fundamentals remain firmly in the dollar’s favor.

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