Insights 
VT 
The Euro is trading defensively, with a 0.3% decrease against the US Dollar. This comes after a weaker-than-expected industrial production report from Germany, which showed a 4.3% decline in August. This drop led to a slight reduction in European Central Bank (ECB) rate expectations.
French Political Situation
Concerns over France’s political situation have eased, as observed by a narrowing spread between France-Germany 10-year yields. The Euro’s risk reversal remains weak, with options now pricing a slight preference for puts over calls. The outgoing French Prime Minister’s efforts to form a coalition have been limited, yet markets show signs of stabilisation.
Comparable market trends are noted elsewhere, as the US government shutdown adds clouds to the economic outlook. Meanwhile, gold prices have surged past $4,000 driven by safe-haven demand amidst geopolitical and economic uncertainties. In cryptocurrencies, Ripple struggles, and Solana maintains a cautious positive trend.
The FXStreet Insights Team compiles these market observations. Legal disclaimers highlight the risks associated with open markets, noting the absence of warranties about the timeliness or accuracy of the information without personalised recommendations.
German Industrial Production Impact
The recent 4.3% drop in German industrial production for August is a major red flag for the Eurozone economy. We see this as a clear signal for continued EUR weakness, as it’s the steepest monthly decline we have observed since the energy crisis of 2023. This fundamentally-driven weakness supports maintaining bearish positions on the EUR in the coming weeks.
This poor German data is directly impacting European Central Bank rate expectations. Money markets are now pricing in just a 15% probability of another rate hike before year-end, a sharp fall from over 50% just a month ago. For us, this means the path of least resistance for the EUR/USD is lower, as interest rate support is fading away.
While concerns over the French political situation have eased slightly, we are not out of the woods. The spread between French and German 10-year bond yields has narrowed from over 80 basis points to around 55, but this political uncertainty remains a background risk. It provides a cap on any potential EUR rallies in the near term.
The options market confirms this bearish sentiment, and we should pay close attention. The premium for EUR puts over calls continues to grow, with the one-month risk reversal now at -0.6, showing traders are actively paying more for downside protection. This suggests a strong belief that the EUR/USD will test lower levels, potentially breaking below the 1.1600 support.
On the other side of the trade, the US dollar remains firm despite the ongoing federal government shutdown that began on October 1st. With the Congressional Budget Office now estimating the shutdown is costing the economy roughly $2 billion per week, we expect continued volatility. However, the dollar’s safe-haven status is currently outweighing these domestic concerns, adding pressure to the EUR/USD pair.
