The EUR/USD pair rose to around 1.1670 during Monday’s European session, driven by an improved risk sentiment. S&P Global Ratings downgraded France to A+ from AA-, the second downgrade within a month following political pressures that included no-confidence votes against Prime Minister Sebastien Lecornu.

In the US, the Federal Reserve might reduce interest rates by a quarter point at the October meeting, anticipated by markets with near certainty. The ongoing US federal government shutdown extends into its 20th day, marking the third-longest lapse in funding in recent history.

The Eurozone’s Influence on Currency

The Euro is the second most traded currency globally, accounting for 31% of foreign exchange transactions in 2022. The European Central Bank (ECB) in Frankfurt oversees monetary policy for the Eurozone, primarily aiming for price stability. Inflation and economic indicators like GDP and employment data significantly influence the Euro’s value.

Trade Balance figures also impact the Euro, with a positive balance enhancing its value. Data from major Eurozone economies, including Germany and France, are key as they make up a large part of the region’s economy. A strong Trade Balance indicates a stronger currency due to increased demand for exports.

Given the current situation on October 20, 2025, we see the EUR/USD pair in a delicate balance around the 1.1670 mark. The primary driver for the US dollar’s weakness is the widely anticipated Federal Reserve rate cut later this month. With markets having priced in a nearly 100% chance of a 25-basis-point cut, this dovish stance is capping any potential USD strength.

The ongoing US government shutdown, now in its 20th day, is also weighing heavily on the dollar. We have seen recent economic forecasts adjusted downwards, with J.P. Morgan, for example, revising its Q4 GDP growth estimate from 1.5% to 1.2% just last week, citing the shutdown’s impact. This political paralysis in the US provides a fundamental reason for dollar weakness that is unlikely to resolve quickly.

Political and Economic Challenges in France

On the other side, the Euro is facing significant headwinds from France, its second-largest economy. S&P’s credit downgrade to A+ is a serious development, and we’ve seen the spread between French and German 10-year bonds widen by 15 basis points in the last month alone. This signals that bond traders are demanding a higher premium to hold French debt due to the perceived risk from its political and budget instability.

For derivative traders, this push-and-pull dynamic suggests that outright directional bets are risky in the immediate term. Instead, the elevated uncertainty makes options strategies focused on volatility look attractive. We are seeing a slight uptick in one-month implied volatility for EUR/USD, and a long straddle or strangle could profit if the pair makes a sharp move in either direction once the market picks a dominant theme.

We are watching for the upcoming German Producer Price Index data, as a weak number could hint at future softness in the Eurozone and give the European Central Bank a reason to adopt a more cautious tone. Looking back at the European sovereign debt crisis over a decade ago, we know that fiscal issues in a core country like France can have an outsized impact on the entire currency bloc. Therefore, we should not underestimate the potential for the French situation to cap the Euro’s gains, even with a weak US dollar.

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