The EUR/USD pair rebounded, climbing above 1.1600 as the US Dollar weakened amid rising trade tensions between the US and China. This recovery followed four days of declines in the Euro and occurred despite political uncertainties in France and disappointing economic data from the Eurozone. French President Emmanuel Macron reappointed Sébastien Lecornu as Prime Minister, putting an end to recent political turmoil. Macron committed to addressing France’s budget issues and overall instability, which have hurt confidence in the Euro.

US Dollar Weakens Amid Trade Tensions

The US Dollar fell after President Trump made new threats about tariffs on China. At the same time, consumer sentiment in the US remained stable, with only minor changes in inflation expectations. The US Dollar Index decreased by 0.52%, reaching 98.87. The EUR/USD pair was also influenced by the Federal Reserve’s position, with the market expecting a 25-basis-point rate cut. Technical indicators show immediate support at 1.1550 and potential resistance at 1.1650. The value of the Euro is affected by several factors, including inflation data, economic performance, and trade balance. High inflation usually leads to interest rate changes by the European Central Bank (ECB), while strong economic performance and a positive trade balance tend to uplift the Euro’s value. Christian Borjon Valencia, a retail trader since 2010, specializes in technical analysis. Given the significant drop in the US Dollar, we see opportunities in the coming weeks due to ongoing dollar weakness. The threat of new tariffs on China plays a major role, creating uncertainty about the US economic outlook. This situation makes long EUR/USD positions more appealing. The market has almost fully priced in a Federal Reserve rate cut for the meeting on October 29th, with odds at 94%. This expectation is a key factor putting downward pressure on the dollar, a trend that has developed over the past several weeks. As derivative traders, we must be ready for volatility around this announcement, but the easiest path for the dollar seems to be downward as the meeting approaches.

Impact of Government Shutdown

The current US government shutdown adds to the dollar’s challenges, which historical data suggests can directly affect economic growth. The shutdown from 2018-2019, for example, was estimated by the Congressional Budget Office to have reduced GDP by about 0.2% in the first quarter of 2019. Any similar economic slowdown today strengthens the case for the Fed to cut rates, putting even more pressure on the dollar. On the Euro side, caution is advised, as gains may be limited by the lingering weaknesses in the Eurozone economy. While the political stability in France is a positive sign, it does not eliminate the underlying challenges facing the region. Recent data indicated that the German manufacturing PMI, a crucial region indicator, fell to 48.5, suggesting a contraction that may prevent the ECB from taking any aggressive measures. This mixed outlook suggests that while going long on EUR/USD is a straightforward trade, using options may be a smarter way to manage risk. For example, buying EUR/USD call options allows us to take advantage of potential gains while also limiting our downside risk if Eurozone data deteriorates unexpectedly. This strategy is particularly relevant as the pair struggles to break through key resistance levels. From a technical standpoint, the EUR/USD is trying to stabilize after falling below its 100-day moving average. Decreasing selling pressure, indicated by the RSI moving toward neutral, supports the idea that the pair may consolidate or rise. We are closely monitoring the 1.1650 level as the first significant resistance; a break above it could lead to a move toward 1.1700 ahead of the Fed’s decision. Create your live VT Markets account and start trading now.

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