The EUR/USD fell to 1.1710 after France’s Prime Minister, Sebastien Lecornu, announced that their Parliament would not meet the year-end budget deadline. To address this, a special rollover law will carry the 2025 budget into the next year. However, the European Central Bank (ECB) kept its rates steady at 2.00% and increased growth and inflation forecasts for 2026, which is supportive for the euro. The ECB and Federal Reserve’s policies are still in favor of an upward trend for the EUR/USD. The ECB’s decision to maintain rates for the fourth meeting in a row matches economic forecasts of stronger growth in the Eurozone than expected. Inflation estimates for 2026 have increased due to ongoing inflation in services. Wage pressures are also rising, as reported in the ECB’s Q3 wage tracker. These elements suggest that the ECB might consider raising rates in the future.

Near Term Caution

With EUR/USD dipping to 1.1710, there is an immediate challenge for this currency pair as we approach the year-end. The French budget issue adds some risk, and with the holiday season reducing market activity, any sharp price movements could be exaggerated. This means we should be cautious in the short term. The French financial situation is important to watch because it reminds us of the past sovereign debt crisis. France’s debt-to-GDP ratio remains above 112%, according to Eurostat’s latest data from Q3 2025, making markets alert to any signs of political deadlock. Traders holding long euro positions might consider buying short-dated put options to protect against a sudden increase in French bond spreads. Still, the euro finds support from the ECB’s strong policy stance. The latest flash estimate for Eurozone inflation shows the core rate holding at 3.1%, while services inflation has risen to 4.2%. This data supports the ECB’s decision to keep rates at 2.00% and signals that the next move is likely a rate hike, not a cut.

Policy Divergence Opportunities

This stands in contrast to the United States, where the Federal Reserve faces different economic conditions. Recent jobless claims have been increasing, nearing 245,000, which indicates a slowing labor market. This difference in policies is the key reason for the EUR/USD uptrend, making this dip a potential buying opportunity. Given these various factors, we should expect an increase in volatility, which can be both a risk and an opportunity. One way to prepare is by using options strategies like straddles, which can benefit from large price changes in either direction without needing to predict the outcome of the French budget situation. Implied volatility for one-month EUR/USD options has already risen to 7.8% this week, reflecting growing uncertainty. For those confident in the ECB’s hawkish approach, this pullback presents an ideal moment for bullish trades. We can use call option spreads to position for a rebound towards recent highs near 1.1763 and possibly beyond 1.1800. This strategy limits our risk while allowing us to take advantage of the stronger long-term trend once the short-term political noise subsides. Create your live VT Markets account and start trading now.

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