The Euro has fallen to weekly lows, trading below 1.1600, as its recovery attempts have stumbled. Traders are waiting for US CPI data and the Federal Reserve’s decision next week, while also keeping an eye on speeches from both the European Central Bank and Fed officials. Currently, the Euro is at 1.1586. The US Dollar has resumed its upward trend as the market remains cautious, anticipating upcoming addresses from central banks.

Impact of Political Stagnation

In the US, political stagnation is ongoing as President Trump has delayed meetings with Democratic lawmakers amidst a four-week government shutdown. Senate efforts to pass a funding resolution have failed 11 times, raising concerns about possible effects on US GDP and the Dollar’s credibility. The Euro is showing mixed results against major currencies, gaining against the British Pound. Meanwhile, the US Dollar is facing challenges as trade tensions with China ease, with a rate cut from the Fed expected later this month. EUR/USD continues to trend downwards, with potential test levels at 1.1545 and further down to 1.1460. Technical indicators suggest a bearish trend, with resistance likely around 1.1650 and higher. The European Central Bank aims to keep inflation near 2%. They use tools like interest rate changes and Quantitative Easing, which typically weakens the Euro. During the pandemic, the ECB resorted to QE due to low inflation, while Quantitative Tightening later helped strengthen the currency.

Historical Market Trends

We are seeing a familiar pattern in EUR/USD, similar to the dynamics from early 2019. Back then, a long US government shutdown and expectations of a Fed shift weighed down the Dollar, even as EUR/USD struggled below 1.1600. This historical perspective is crucial as we navigate today’s market. Political tension in Washington is significant once again, with contentious debt ceiling negotiations expected this year. Looking back at the 35-day shutdown from 2018-2019, which the Congressional Budget Office estimated reduced first-quarter GDP by 0.2%, shows how this can affect the Dollar. This risk is currently keeping bullish sentiment on the Dollar in check. Just like traders anticipated a Fed easing back then, the market is now pricing in the first rate cuts for the second quarter of 2026. Recent US CPI data indicates that headline inflation has cooled to an annualized 2.5%. Fed funds futures now suggest over a 70% chance of a 25-basis-point cut by May 2026, reinforcing the view that the Fed’s tightening cycle is over. In contrast, the European Central Bank seems to be on a different path. Eurozone inflation remains sticky at 2.8%, and several ECB officials have recently opposed premature discussions about rate cuts. This difference in policy is supporting the Euro and limiting the downside for the EUR/USD pair. Given this situation, we believe that buying short-dated EUR/USD call options is a smart strategy for potential upward movement. A strike price around 1.1050 would offer exposure to a breakout above recent resistance, especially if upcoming US labor market data shows signs of softening. This approach allows traders to take advantage of potential gains while clearly defining their risk. Create your live VT Markets account and start trading now.

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