The EUR/USD pair has fallen to about 1.1630, continuing its decline for two days. This drop is in line with a stronger US Dollar, which is rising due to hopes that the US government shutdown could soon end. The US Dollar Index, which measures the Dollar against six major currencies, has increased to around 98.70. The Dollar has also strengthened against the Japanese Yen, rising by 0.24%.

Possible End to the Government Shutdown

This rise comes after remarks from White House economic adviser Kevin Hassett about the possibility of ending the shutdown. Additionally, there is optimism for a successful meeting between US President Trump and Chinese leader Xi Jinping at the upcoming Asia-Pacific Economic Cooperation meeting. Investors are looking forward to the US Consumer Price Index data for September, which could influence the Federal Reserve’s policy decisions. While the Dollar rises against the Euro, the Euro is still strong against other currencies, as the European Central Bank is expected to keep interest rates stable. As the primary global currency, the US Dollar makes up over 88% of the world’s foreign exchange trading. The Federal Reserve’s policies, including interest rate changes and quantitative easing, significantly impact the Dollar’s value. Conversely, quantitative tightening typically strengthens the Dollar. With the EUR/USD pair nearing 1.1630, the strength of the Dollar is the main factor driving this trend. Optimism about the resolution of the government shutdown is relieving some market uncertainty. For derivative traders, this suggests a chance to bet on continued Dollar strength against the Euro in the near term. This trend is backed by recent data. The September jobs report showed an impressive gain of 210,000 jobs, and inflation, while slightly slowing, is still above the Federal Reserve’s target at 3.1%. On the other hand, the Eurozone’s October flash PMI came in at 49.5, indicating economic contraction and highlighting a growing gap favoring the Dollar.

Trading Strategies During Volatility

With the US Consumer Price Index (CPI) data on the horizon, implied volatility on EUR/USD options is likely to increase. Traders might consider buying puts or setting up bear put spreads in anticipation of further declines, especially if inflation data exceeds expectations. This approach can help limit risk and take advantage of potential price drops. Looking back to the inflation spike of 2022, we saw the Dollar rally when the Fed’s policy was stronger than other central banks. The current situation seems similar, as the European Central Bank has shown no intention of raising rates. Historical trends suggest that these policy differences can lead to sustained currency movements lasting several months. Although the ECB maintaining rates is supportive for the Euro against other currencies, it puts the Euro at a disadvantage against the Dollar. Last month’s negative industrial production figures from Germany reinforce the belief that the ECB will stay inactive. Thus, any strength in the Euro should be approached cautiously until economic data in the region shows clear improvement. The potential for a US-China trade agreement at the upcoming APEC meeting adds another factor to consider. A positive outcome could enhance global risk appetite, which might temporarily weaken the safe-haven Dollar. However, any rally in the EUR/USD should be seen as an opportunity to establish new short positions at more favorable rates, as fundamental economic factors continue to favor the Dollar. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now