The EUR/USD pair has bounced back to about 1.1645, ending a three-day decline during Thursday’s Asian trading session. The ongoing US government shutdown, which has now lasted nine days, is weakening the US Dollar and complicating the Federal Reserve’s choices on interest rates. The shutdown means key agencies have stopped data collection, affecting economic evaluations. Minutes from the Fed’s September meeting show support for interest rate cuts, but some officials caution against this due to concerns about inflation.

Political Instability in France

At the same time, political instability in France, sparked by Prime Minister Sebastien Lecornu’s resignation, could have an effect on the Euro. President Macron is under pressure to call for snap elections to tackle unrest in the Eurozone’s second-largest economy. The Euro is the currency of 19 EU countries and is the second most traded currency after the US Dollar. The European Central Bank (ECB) in Frankfurt is in charge of monetary policy and strives to keep prices stable. Economic indicators like inflation, GDP, and trade balance play a significant role in determining the Euro’s value, with a strong economy benefiting the currency. Currently, the extended US government shutdown, now in its tenth day, is causing considerable uncertainty, which we can leverage. The absence of crucial economic data from agencies like the Bureau of Labor Statistics is complicating the Federal Reserve’s path and increasing expectations for more rate cuts. As a result, one-month implied volatility for EUR/USD has risen to 8.5%, reflecting market unease and creating chances for options traders.

Fed’s Dovish Stance

The Fed’s dovish stance, already evident in the September meeting minutes, is intensified by the ongoing shutdown. Markets are now estimating a greater than 70% chance of another rate cut by the end of the year, as the economic impact of the political stalemate is expected to grow. This situation continues to pressure the US Dollar, giving support to the EUR/USD pair in the short term. Historically, shutdowns can vary in length; for instance, there was a 16-day shutdown in 2013 and a record 35-day closure in late 2018 and early 2019. The current situation could extend, meaning the data blackout and pressure on the dollar might continue for weeks. This history suggests that preparing for ongoing uncertainty is a wise strategy. Nonetheless, we should temper our optimistic outlook on the Euro due to the political crisis in France. This turmoil is creating a significant challenge for the single currency, as shown by the increasing spread between French and German 10-year government bond yields, which has reached 65 basis points. The political risks in the Eurozone’s second-largest economy are likely to limit any major rise in the EUR/USD. Given these conflicting factors, we consider simple directional bets to be risky in the upcoming weeks. A smarter approach is to trade on the rising volatility itself through strategies like long straddles or strangles, which profit from significant price movements in either direction. Selling options for premium seems unwise until there’s more clarity from both Washington and Paris. Create your live VT Markets account and start trading now.

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