The EUR/USD pair is dropping to about 1.1620 in the early European trading, mainly due to worries over political troubles in France. The leader of France’s Socialist party is contemplating a no-confidence bill if their financial demands are ignored. Even though the Euro is falling, there’s a hopeful outlook as it remains above the 100-day EMA. However, the bearish RSI near 45.75 suggests more declines might be on the way. Resistance levels are at 1.1694, 1.1755, and 1.1820. Key support can be found at 1.1575, 1.1545, and 1.1403.

The Euro Currency

The Euro serves as the currency for 19 EU countries in the Eurozone and is the second most popular currency after the US Dollar. In 2022, it made up 31% of all forex transactions, with over $2.2 trillion traded daily. The European Central Bank (ECB) in Frankfurt oversees monetary policy for the Eurozone, influencing the Euro’s value through interest rate changes. Inflation data from the Eurozone can lead to ECB actions that impact the Euro’s strength. Economic signals such as GDP, PMIs, and trade balance also play a role in determining the Euro’s worth. A strong economy usually strengthens the Euro, while a weak one can weaken it. The trade balance measures the difference between a country’s earnings from exports and its spending on imports, affecting the currency’s strength. Currently, the EUR/USD is weakening to 1.1620 as the week begins, mainly due to political uncertainties in France. The risk of a no-confidence vote is real, and the motion has been officially filed. This has driven French 10-year bond yields up by 8 basis points to 3.15%. While the long-term outlook for the pair remains positive above the 100-day moving average, the immediate political risks have unsettled the market.

Traders Watch

For traders, the key level to monitor is the 100-day EMA at 1.1575. If it breaks decisively below this support, it could lead to further declines, making it a good time to think about buying put options to protect against or profit from a drop toward the 1.1545 level. The bearish RSI of around 45.75 already indicates weakening momentum, supporting this cautious view. Additionally, the latest economic reports are not providing much help for the Euro. Preliminary data showed that Eurozone HICP inflation for October eased to 2.1%, just shy of predictions, which lessens the pressure on the European Central Bank to act aggressively. Moreover, the recent S&P Global Eurozone Composite PMI was recorded at 49.8, suggesting a slight decrease in business activity, which weighs down the Euro’s fundamental strength. On the other side, the US Dollar is gaining strength from expectations of a strong Federal Reserve policy. Recently, US Core PCE data showed a year-over-year increase of 3.8%, slightly above expectations, reinforcing the idea that the Fed may keep interest rates higher for an extended time. This difference in policy between a cautious ECB and a determined Fed continues to pressure the EUR/USD pair. Reflecting on past events, we can see similar market anxieties before the 2017 French presidential election. At that time, the Euro experienced considerable volatility but eventually rose once political uncertainties were resolved. This historical context suggests that, while the current situation calls for cautious approaches, the drop could be a temporary reaction rather than a signal for a long-term decline. Given the increased political risk, implied volatility in EUR/USD options has risen, creating a potential opportunity. Selling out-of-the-money calls above the 1.1755 resistance level could be a wise strategy to collect premiums while the market awaits clearer signals from Paris. This method allows traders to benefit from the heightened uncertainty without taking a strong directional stance. Create your live VT Markets account and start trading now.

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