Insights 
VT 
EUR/USD is trading around 1.1640 for the fourth consecutive session, boosted by remarks from ECB’s José Luis Escrivá about stable borrowing costs and target inflation. Traders await the German IFO Business Survey data due later.
There is potential downside for the Euro due to French political tensions, with Olivier Faure threatening to topple the government unless budget demands are met. Faure insists on higher taxes on billionaires.
US China Trade Resolution
The US Dollar might strengthen, as the US and China have reportedly resolved major trade disputes, setting the stage for a Trump-Xi meeting to finalise a trade deal. US Treasury Secretary Scott Bessent indicated President Trump’s 100% tariffs threat on Chinese goods is void.
The Euro is the currency for 19 EU countries, second in global trade after the US Dollar. It makes up 31% of foreign exchange transactions, with a daily turnover exceeding $2.2 trillion. The ECB in Frankfurt manages Eurozone monetary policy, impacting the Euro through interest rate adjustments.
Inflation higher than ECB’s 2% target may compel rate hikes, strengthening the Euro. Economic indicators like GDP and PMIs also affect its value, with data from Germany, France, Italy, and Spain being particularly important.
We are seeing the EUR/USD pair holding its recent gains around the 1.1640 level, but the upward momentum is facing significant headwinds. The major risk for the Euro is the political uncertainty in France, where a no-confidence motion could be submitted today. This contrasts sharply with a strengthening US Dollar, which is benefiting from positive developments in the US-China trade negotiations.
German IFO Business Climate Index
The German IFO Business Climate index for October came in this morning at 90.2, missing expectations and adding a layer of caution for the Eurozone’s largest economy. This uncertainty is reflected in the options market, where the Deutsche Bank Euro Volatility Index (EUVIX) has climbed to 9.5, a level not seen since the Italian debt concerns of 2024. This suggests we should prepare for sharper price swings in the coming weeks.
While an ECB official’s comments over the weekend were supportive, they do not necessarily signal that a more aggressive, hawkish policy is coming. Eurostat’s latest flash estimate for October showed inflation holding steady at 2.1%, which keeps the central bank in a neutral stance for now. Without the prospect of higher interest rates, any significant, sustained rally in the Euro seems unlikely.
The more compelling story for us remains the likely finalization of a US-China trade deal this Thursday, which appears much more certain than it did during the breakdowns of 2023. A finalized agreement would likely reduce global risk and strengthen the US Dollar, putting downward pressure on the EUR/USD pair. Given the opposing forces at play, using options to hedge against a potential drop in the Euro or to position for increased volatility would be a prudent strategy.
