Insights 
VT 
The EUR/USD pair has rebounded to approximately 1.1645, breaking a three-day losing streak during Thursday’s Asian trading session. The extended US government shutdown, now in its ninth day, is weakening the US Dollar, complicating the Federal Reserve’s decision-making process on interest rates.
The shutdown has led to the suspension of data collection by key agencies, affecting economic assessments. Minutes from the Fed’s September meeting reveal support for interest rate cuts, although some officials urge caution due to inflation concerns.
Political Instability in France
Meanwhile, political instability in France, triggered by Prime Minister Sebastien Lecornu’s resignation, could impact the Euro. President Macron faces pressure for snap elections to resolve unrest in the Eurozone’s second-largest economy.
The Euro is the currency for 19 EU countries and is second only to the US Dollar in trade volume. The European Central Bank (ECB), based in Frankfurt, manages monetary policy and aims to maintain price stability. Economic indicators such as inflation, GDP, and trade balance significantly influence the Euro’s value, with a strong economy benefiting the currency.
As we see it, the prolonged US government shutdown, now entering its tenth day, is creating significant uncertainty that we can use. The lack of key economic data from agencies like the Bureau of Labor Statistics complicates the Federal Reserve’s path, fueling bets on further rate cuts. One-month implied volatility for EUR/USD has consequently risen to 8.5%, reflecting the market’s nervousness and creating opportunities for options traders.
Fed’s Dovish Stance
The Fed’s dovish stance, already clear from the September meeting minutes, is being amplified by this shutdown. Markets are now pricing in a greater than 70% probability of another rate reduction by year-end, as the economic drag from the political stalemate is expected to grow. This backdrop continues to weigh on the US Dollar, providing a tailwind for the EUR/USD pair in the immediate term.
Looking back, we know these shutdowns can vary in length, from the 16-day event in 2013 to the record 35-day impasse in late 2018 and early 2019. The current situation could easily extend, meaning the data blackout and pressure on the dollar may persist for weeks. This historical context suggests that positioning for continued uncertainty is a prudent strategy.
However, we must temper our bullish outlook on the Euro due to the political turmoil in France. The crisis is creating a notable headwind for the single currency, evidenced by the widening spread between French and German 10-year government bond yields, which has hit 65 basis points. This political risk in the Eurozone’s second-largest economy is likely to cap any significant rally in the EUR/USD.
Given these opposing forces, we believe simple directional bets are risky in the coming weeks. A better approach is to trade the rising volatility itself through derivative strategies like long straddles or strangles, which profit from a large price move in either direction. Selling options to collect premium seems ill-advised until we get more clarity from both Washington and Paris.
