Insights 
VT 
The EUR/USD rate rose above 1.1670, after dropping from its 1.1730 high during the earlier Asian session. The Euro fell due to the surprise resignation of France’s Prime Minister, Sébastien Lecornu, which has led to a political crisis in France.
In the US, attempts to fund the Federal Government failed in the Senate, causing a second week of government closure, with threats of federal worker layoffs. The Eurozone Retail Sales showed a 0.1% monthly rise in September, while in the US, the Kansas City Federal Reserve President’s conference is of note.
Euro Struggles Amid Political Turmoil
The Euro is struggling amid France’s political turmoil, with the possibility of a snap election affecting its strength. In Japan, the new Prime Minister’s pro-stimulus stance is impacting monetary policy expectations and affecting the Yen’s value. Fed discussions on monetary policy reveal differing opinions, but many expect a rate cut by month-end.
EUR/USD is experiencing intense selling, with technical pressures keeping it around the 1.1645 support level. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicate bearish trends, with potential resistance at 1.1685 and 1.1730.
ECB President Christine Lagarde and Fed’s Jeff Schmid are scheduled to speak, potentially impacting the Euro and the US Dollar, respectively.
Given the political turmoil in France, we should anticipate continued weakness in the Euro. The resignation of a fifth prime minister under Macron signals deep instability that will likely overshadow any stable economic data. This puts immediate and sustained pressure on the EUR/USD pair.
The situation in France feels similar to the uncertainty we saw leading up to the 2017 French presidential election, when fears of a populist victory weighed heavily on the single currency. Political risk is now the dominant factor for the Euro, making it vulnerable to further declines. Derivative traders should position for a move lower, as markets will price in the possibility of a snap election.
Investor Flight to Safety
To confirm this view, we’re seeing the spread between French and German 10-year government bonds widening, which as of this morning has reached over 55 basis points. This is a classic sign of investor flight from French debt toward safer German bunds, a trend that historically precedes further Euro weakness. This spread is a key indicator to watch in the coming days.
On the other side of the pair, the US government shutdown is creating noise but is unlikely to support the Euro. During the protracted shutdown in late 2018 and early 2019, the U.S. Dollar Index (DXY) actually remained stable and even strengthened slightly, as markets focused more on global growth concerns. We expect the market’s attention to remain on the Federal Reserve’s policy path rather than on temporary government dysfunction.
The overwhelming market expectation, with a 95.7% probability priced in for a Fed rate cut this month, will act as a ceiling for the dollar. This doesn’t mean the dollar will collapse, but its potential for a strong rally is severely limited. Therefore, the path of least resistance for EUR/USD is downward, driven by the acute crisis in Europe.
For the coming weeks, we should consider buying put options on EUR/USD to profit from a continued slide while defining our maximum risk. Targeting strikes below the 1.1645 support level, such as 1.1600 or 1.1550, seems prudent. These positions will benefit from both the expected drop in price and a likely increase in implied volatility.
Speeches from ECB President Lagarde and Fed President Schmid later today are critical event risks. Any dovish tone from Lagarde, perhaps acknowledging the French political crisis, would accelerate the Euro’s decline. Traders could use long straddles to trade the volatility around these speeches if the direction is uncertain, but the underlying bearish bias for the Euro remains our primary thesis.
