Insights 
VT 
The Euro fell against the US Dollar, dropping from last week’s highs near 1.1670 to below 1.1500, marking a four-day decrease of approximately 1.3%. This decline coincides with a strengthened US Dollar, driven by the Federal Reserve’s firm stance on interest rates, impacting risk appetites unfavourably.
In the Eurozone, manufacturing activity marginally improved in October, reaching a standstill with an index of 50.0 up from 49.8 in September. Meanwhile, manufacturing figures in Germany and other major economies exhibited slight improvements, but these did not offer much support to the Euro.
US Dollar Steadiness
US Dollar steadiness persists due to decreased market expectations for an interest rate cut in December, with chances falling to 67% from over 90%. Key attention shifts to US Manufacturing PMI data, expected to reach 49.2, up from 49.1 in September, suggesting a potential boost to the Dollar.
Technical indicators show strong bearish sentiment for EUR/USD, with support levels breaking below 1.1530. The ISM Manufacturing PMI provides insights into the manufacturing sector, acting as a leading economic indicator. A reading over 50 suggests expansion, positive for the US Dollar, while under 50 indicates a contraction.
The EUR/USD is showing significant weakness, having fallen for four straight days to test the 1.1500 level. This downward pressure comes from a strengthening US Dollar after the Federal Reserve indicated it would remain hawkish. We see this as a clear signal that the path of least resistance for the pair is lower.
This trend is fundamentally supported by the wide interest rate differential between the US and the Eurozone. We note the Fed funds rate is holding firm in the 5.25-5.50% range, while recent data showed Eurozone inflation fell to a two-year low of 2.9% in October, giving the European Central Bank little reason to match the Fed’s stance. This policy divergence is the primary driver behind the dollar’s strength against the euro.
Strategy Focus
For the coming weeks, our strategy should focus on bearish positions. Any upward movement towards the previous support levels of 1.1530 or 1.1550 should be treated as an opportunity to initiate new short positions. The momentum is clearly to the downside, and there is little on the European economic calendar to challenge this narrative.
Derivative traders should consider buying EUR/USD put options with strike prices below 1.1500, targeting the 1.1440 level. Another strategy is to sell out-of-the-money call spreads with strikes above the 1.1580 resistance area. These positions allow us to profit from either a continued decline or a period of consolidation at these multi-month lows.
Today’s ISM Manufacturing PMI release at 15:00 is the key event risk, especially since the ongoing government shutdown makes private data more critical. Looking back, we saw a prolonged period of manufacturing contraction throughout 2023 and 2024, so the market will react strongly to any significant deviation from the 49.5 consensus. A stronger-than-expected number would likely reinforce dollar strength and accelerate the move lower in EUR/USD.
