The EUR/USD pair rose slightly after losing nearly 0.5% the previous day, trading around 1.1570 during Asian hours on Tuesday. The market is holding steady as it awaits Germany’s ZEW Survey data and the final September Harmonized Index of Consumer Prices (HICP). Political tensions in France are weighing on the euro. President Macron appointed a new Prime Minister despite facing a no-confidence vote from opposition leaders. At the same time, the US Dollar remained under pressure, with a 97% likelihood of an interest rate cut in October and a 92% chance in December, according to the CME FedWatch Tool.

Impact of US Trade Tariffs

The Philadelphia Fed President has commented on trade tariffs and how they might affect inflation, suggesting that the US central bank should consider more rate cuts. The USD is also facing headwinds due to concerns about the ongoing US government shutdown, which is impacting the economy. The Euro is the official currency for 19 European Union countries and accounts for 31% of all foreign exchange transactions. Economic factors like GDP and trade balances play a significant role in the Euro’s value. The economic data from Germany, France, Italy, and Spain is crucial since it makes up 75% of the Eurozone economy. With the EUR/USD pair hovering around 1.1570, two opposing forces are at play. The US dollar is weakening because of the government shutdown and a dovish Federal Reserve. Meanwhile, the Euro faces significant political uncertainty in France. The pressure on the dollar is considerable, with markets predicting a 97% chance of an interest rate cut this month. Looking back at the 35-day US government shutdown in late 2018 and early 2019, which cost an estimated $11 billion in GDP, we can see why traders are pricing in economic concerns now. This situation makes shorting the dollar an appealing strategy, though it is a crowded trade.

French Political Impact on Euro

For the Euro, the no-confidence vote against the new French government is a critical event that could lead to sudden volatility. The market experienced jitters during the 2017 French presidential election, highlighting how sensitive the Euro is to political risks in its key countries. Buying options straddles, which benefit from large price movements in either direction, could be a good strategy to capture potential changes. Currently, the pair is stable, and implied volatility is low, making options more affordable. The Euro Currency Volatility Index (EVZ) has been sitting near a historically low level of 6.5, indicating complacency in the market. Traders should consider purchasing volatility now, ahead of the French political developments and the Fed’s decision. The upcoming German ZEW Economic Sentiment survey will draw immediate market attention. A weak reading from Germany, the Eurozone’s largest economy, could break the 1.1550 support level, particularly amid the French political drama. We can expect traders to aggressively buy put options to hedge or speculate on further declines. Create your live VT Markets account and start trading now.

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