The EUR/USD pair is weakening to around 1.1620 during the early European session, influenced by expected political unrest in France. France’s Socialist party leader is considering a no-confidence bill, if their fiscal demands are not addressed.

Despite the Euro softening, a positive outlook persists above the 100-day EMA, though the bearish RSI near 45.75 suggests possible further declines. Resistance is at 1.1694, followed by 1.1755 and 1.1820, while key support levels are at 1.1575, 1.1545, and 1.1403.

The Euro Currency

The Euro is the currency for 19 EU countries in the Eurozone, second only to the US Dollar. In 2022, it accounted for 31% of all forex transactions, with a daily turnover over $2.2 trillion.

The European Central Bank (ECB) in Frankfurt manages the Eurozone’s monetary policy, impacting the Euro through interest rate adjustments. Eurozone inflation data can necessitate ECB actions, affecting the Euro’s strength.

Economic indicators like GDP, PMIs, and trade balance can influence the Euro’s value. A strong economy typically bolsters the Euro, while weakness can depress it. The trade balance measures the disparity between a country’s export earnings and import expenses, affecting currency strength.

The EUR/USD is weakening around 1.1620 as we start the week, largely due to political uncertainty in France. The threat of a no-confidence vote has become a reality, with the motion now officially filed, causing French 10-year bond yields to climb 8 basis points to 3.15%. This suggests that while the pair holds a generally positive long-term view above the 100-day moving average, the immediate political risk is causing tangible market nervousness.

Traders Watch

For traders, the critical level to watch is the 100-day EMA at 1.1575. A decisive break below this support could signal a deeper move down, making it an opportune moment to consider buying put options to hedge against or profit from a decline towards the 1.1545 level. The bearish RSI indicator, currently near 45.75, already points to weakening momentum, supporting this cautious stance.

Adding to the Euro’s challenges, the latest economic data is not providing much support. Preliminary data showed Eurozone HICP inflation for October cooled slightly to 2.1%, just under forecasts, reducing pressure on the European Central Bank to be more aggressive. Furthermore, the most recent S&P Global Eurozone Composite PMI registered at 49.8, indicating a slight contraction in business activity and weighing on the single currency’s fundamental strength.

On the other side of the pair, the US Dollar is finding support from expectations of a persistently firm Federal Reserve policy. Recent US Core PCE data came in at 3.8% year-over-year, slightly above expectations, which reinforces the case for the Fed to hold interest rates higher for longer. This policy divergence between a cautious ECB and a steadfast Fed continues to place underlying pressure on the EUR/USD.

Looking back, we can see parallels to the market jitters preceding the 2017 French presidential election. The Euro saw significant volatility then but ultimately rallied once the political uncertainty cleared. This historical perspective suggests that while the current situation warrants defensive positioning, the sell-off could be a temporary reaction rather than a long-term trend reversal.

Given the heightened political risk, implied volatility in EUR/USD options has ticked up, presenting a potential opportunity. Selling out-of-the-money calls above the 1.1755 resistance level could be a strategy to collect premium while the market waits for clarity from Paris. This approach allows traders to capitalize on the increased uncertainty without taking an aggressive directional bet.

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