Insights 
VT 
The EUR/USD weakened, ending a three-day winning run, as the US Dollar gained strength following President Trump’s softened approach on US-China trade tensions. The EUR/USD was trading around 1.1663, retreating from earlier highs. Meanwhile, the US Dollar Index stabilised around 98.50 after earlier declines. Trump stated his planned 100% tariffs on Chinese imports were unsustainable, easing market concerns.
The WTO has warned that prolonged trade tensions could reduce global GDP by up to 7% in the long term. The Federal Reserve is expected to implement two 25 basis-point rate cuts in October and December, as indicated by CME FedWatch tool. Additionally, the current US government shutdown is creating broader fiscal worries. Eurozone sentiment steadied after the French Prime Minister survived two no-confidence votes.
Eurozone Inflation Data
Eurozone inflation data remained stable, with core and headline HICP showing modest monthly and annual increases. The ECB maintained a cautious outlook, with officials noting resilience in the economy. Despite the US Dollar’s temporary rise, regional banking issues and ongoing geopolitical tensions continue to add uncertainty. The US Dollar performed strongest against the British Pound with a 0.28% gain.
The US Dollar’s rebound feels temporary, driven more by a change in tone than a change in policy. We see the current dip in EUR/USD below 1.1700 as a potential opportunity, not a reversal of the trend. The market is giving us a better price to position for expected dollar weakness in the coming weeks.
Underlying fundamentals still point to a weaker dollar, with markets fully pricing in a 25 basis point Fed rate cut later this month and another in December. The latest US Core PCE number for September came in at 2.8%, a slight miss which only reinforces the view that the Fed has the green light to ease policy. These rate cuts are the real story, not the day-to-day trade headlines.
Growing Domestic Risks
We must not ignore the growing domestic risks in the United States, including the prolonged government shutdown and worrying signs of turbulence in regional banks. This situation feels eerily similar to the tremors we experienced back in early 2023, which prompted the Fed to step in with emergency support. These factors create a significant headwind for the US Dollar that a single positive trade comment cannot erase.
From the Eurozone, the situation appears far more stable, with the European Central Bank on hold and immediate political risks in France subsiding. Eurozone inflation remains steady around 2.2%, giving the ECB no urgent reason to act, which contrasts sharply with the dovish pressure building on the Fed. This policy divergence should provide a solid floor for the EUR/USD pair.
For derivative traders, this suggests that buying call options on EUR/USD for November or December expirations could be a prudent strategy, capitalizing on the expected resumption of the dollar’s downtrend. The Cboe Volatility Index (VIX) has eased to 19 from its recent highs, potentially making options cheaper to acquire right now. We believe the fundamental case for a weaker dollar will reassert itself once the noise from trade rhetoric fades.
