Insights 
VT 
The Euro (EUR) has experienced a minor decline of 0.1% against the US Dollar (USD) but is performing better than most G10 currencies. Renewed trade tensions are influencing sentiment, offering some relative support for the EUR as an alternative haven. German ZEW sentiment data have underwhelmed expectations, posing additional downside risk for industrial production outlooks. Meanwhile, German-US yield spreads remain unchanged, providing no fundamental reason for the EUR’s recent decline.
Political developments in the region are causing concern, particularly with French PM Lecornu’s latest budget efforts. The widening France-Germany yield spreads suggest a shift in risk perception ahead of a no-confidence vote from the National Rally’s Le Pen. Market momentum indicates a bearish trend, with the RSI nearing fresh lows in the upper 30s. Key support levels are absent up to 1.1500, with near-term fluctuations expected between 1.1480 and 1.1620.
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Given the renewed trade tensions, the US Dollar is strengthening, but the Euro is showing some relative resilience as an alternate haven currency. This dynamic, however, is being challenged by clear internal weaknesses within the Eurozone. We are therefore advising a cautious to bearish stance on the EUR/USD pair in the coming weeks.
The outlook for the Eurozone economy is dimming, underscored by Germany’s weaker-than-expected ZEW sentiment data. This follows last week’s report showing German factory orders for August 2025 fell by 1.2%, reinforcing the risk of a technical recession this winter. The lack of a corresponding move in German-US yield spreads suggests this economic reality has not been fully priced into the currency.
Political risk in France is a major near-term catalyst for volatility, with a no-confidence vote planned for this Thursday. The widening spread between French and German government bond yields is a clear signal of market stress, a pattern we also observed during the political turmoil following the snap election back in mid-2024. A successful no-confidence vote could trigger a sharp sell-off in the Euro.
Trading Strategies
For traders anticipating a downward move, buying put options on the EUR/USD with strike prices at or below the 1.1500 support level is a direct strategy. Considering expiries in late October or early November would capture potential fallout from the French budget crisis. The early August 2025 low just under 1.1400 serves as a logical primary target.
The political uncertainty makes a compelling case for buying volatility. Implied volatility on one-month EUR/USD options has already risen to 7.2% from 6.0% over the past ten days, but we expect it could spike above 9% if the French government faces collapse. A long straddle would profit from a large price move in either direction, which is a distinct possibility this week.
Within the suggested 1.1480 to 1.1620 range, a more conservative strategy involves selling call spreads. A bear call spread with a short strike above 1.1620 would allow traders to collect premium while defining their risk. This position benefits if the EUR/USD pair stays below this key resistance level through expiration.
