The EUR/USD pair saw a modest rise after incurring nearly 0.5% losses the previous day, trading at approximately 1.1570 during Asian trading hours on Tuesday. The pair maintained its position in anticipation of Germany’s ZEW Survey data and the final September Harmonized Index of Consumer Prices (HICP).

Political tensions in France exerted pressure on the euro, as President Macron reappointed a new Prime Minister despite facing a no-confidence motion from opposition leaders. Simultaneously, the US Dollar remained restrained with a 97% chance of rate cut expectations for October and a 92% chance for December, as indicated by the CME FedWatch Tool.

Impact Of US Trade Tariffs

Philadelphia Fed President commented on trade tariffs and their likelihood of impacting inflation, arguing for further rate cuts by the US central bank. The USD also suffered from caution surrounding the ongoing US government shutdown, affecting the broader economy.

The Euro is the currency for 19 European Union countries, accounting for 31% of all foreign exchange transactions. Economic indicators like GDP and the trade balance significantly influence the Euro’s value, benefiting from high rates and positive trade balances. Data from Germany, France, Italy, and Spain is influential, representing 75% of the Eurozone’s economy.

Given the current stalemate in EUR/USD around 1.1570, we see the market being pulled by two opposing forces. On one hand, the US dollar is weakening due to an ongoing government shutdown and a highly dovish Federal Reserve. On the other hand, the Euro is being held back by significant political uncertainty in France.

The pressure on the dollar is intense, with markets pricing in a 97% probability of an interest rate cut this month. We can look back at the 35-day US government shutdown in late 2018 and early 2019, which trimmed an estimated $11 billion from GDP, to understand the economic drag traders are now pricing in. This makes shorting the dollar a compelling, though crowded, trade.

French Political Impact On Euro

For the Euro, the no-confidence motion against the new French government is a major binary event that could cause a sudden spike in volatility. We remember the market jitters during the French presidential election in 2017, which shows how sensitive the Euro is to political risk in its core countries. This situation makes buying options straddles, which profit from a large move in either direction, an attractive strategy to capture the potential breakout.

With the pair currently treading water, implied volatility is likely low, making options relatively inexpensive. The Euro Currency Volatility Index (EVZ) has been hovering near a historically low 6.5, suggesting complacency in the market. Traders should consider buying volatility now, ahead of the French political outcome and the Fed’s decision.

The upcoming German ZEW Economic Sentiment survey will be the market’s immediate focus. A poor reading from Germany, the Eurozone’s largest economy, could be the catalyst that breaks the 1.1550 support level, especially when combined with the French political drama. We would then expect traders to aggressively purchase put options to hedge or speculate on further downside.

Create your live VT Markets account and start trading now.