Insights 
VT 
The Euro has declined to weekly lows, trading below 1.1600, as earlier recovery attempts faltered. Traders await US CPI data and the Federal Reserve’s decision next week, keeping an eye on speeches from the European Central Bank and Fed officials.
The Euro has dipped to one-week lows, trading at 1.1586. The US Dollar resumed its upward trend as the market remains cautious, anticipating central bank addresses later.
Political Stagnation Impact
In the US, political stagnation continues as President Trump postponed meetings with Democratic lawmakers, amidst a four-week government shutdown. Senate attempts to pass a funding resolution have failed 11 times, raising concerns over potential impacts on US GDP and Dollar credibility.
The Euro has shown mixed performance against other major currencies, gaining on the British Pound. The US Dollar faces restraints as trade hostilities with China cool, with a potential Fed rate cut anticipated later this month.
EUR/USD remains on a downward path, with prospects of testing levels around 1.1545 and further down to 1.1460. Technical indicators suggest a bearish trend, with resistance potentially encountered at 1.1650 and beyond.
The European Central Bank’s key role is maintaining inflation near 2%. Their policy tools include interest rate adjustments and Quantitative Easing, traditionally weakening the Euro. During the pandemic, QE was a response to low inflation, with Quantitative Tightening providing a stronger currency rebound.
Historical Market Dynamics
We are seeing a familiar pattern in the EUR/USD, reminiscent of the market dynamics from early 2019. Back then, a protracted US government shutdown and expectations of a Federal Reserve pivot weighed on the dollar, even as the pair struggled below 1.1600. This historical parallel is important as we navigate the current market landscape.
Today, political friction in Washington is once again a key factor, with contentious debt ceiling negotiations expected before the end of the year. We only need to look back at the 35-day shutdown of 2018-2019, which the Congressional Budget Office estimated shaved 0.2% off first-quarter GDP, to understand how this can restrain the dollar. This risk is keeping bullish sentiment on the US dollar in check for now.
Just as traders back then were anticipating Fed easing, the market is now pricing in the first rate cuts for the second quarter of 2026. With the latest US CPI data released last week showing headline inflation has cooled to an annualized 2.5%, Fed funds futures now imply over a 70% chance of a 25-basis-point cut by May 2026. This reinforces the view that the Fed’s tightening cycle is firmly in the past.
The European Central Bank, however, appears to be on a slightly different path. Eurozone inflation remains stickier, with the latest figures holding at 2.8%, and several ECB officials have recently pushed back against premature talk of rate cuts. This policy divergence is providing underlying support for the Euro and limiting the downside for the EUR/USD pair.
Given this backdrop, we believe buying short-dated EUR/USD call options is a reasonable strategy to position for a potential move higher. A strike price around 1.1050 would provide exposure to a breakout above recent resistance, especially if upcoming US labor market data shows any signs of softening. This approach allows traders to capitalize on potential upside while clearly defining risk.
