EUR/USD shows moderate gains, trading around 1.1735 in Thursday’s Asian session. Concerns about a US government shutdown are weakening the US Dollar, and the release of the weekly Initial Jobless Claims has been delayed due to this shutdown. The shutdown happened because Congress couldn’t agree on funding, which affects the release of important economic data, like the September employment report. The Trump administration has also frozen $26 billion, impacting Democratic-led states. The CME FedWatch tool indicates a 99.4% chance of a 25-basis-point rate cut by the Fed in October, up from 96.2%.

Eurozone Inflation and ECB Position

The US Supreme Court is set to hear arguments in January regarding Trump’s move to dismiss Fed Governor Lisa Cook. ECB President Christine Lagarde stated there is no immediate threat to inflation in the Eurozone, and the ECB is not in a hurry to change borrowing costs, which supports the Euro. The Euro is the currency used in the Eurozone and accounts for 31% of global foreign exchange transactions. High interest rates in the Eurozone tend to benefit the Euro. The Euro’s value is significantly influenced by economic performance and inflation data. The Trade Balance also impacts the Euro’s strength. A positive trade balance helps strengthen it, while a negative balance weakens it. The four largest economies in the Eurozone contribute 75% to the region’s economy.

USD Weakness and Market Opportunities

With EUR/USD trading above 1.1700, the US government shutdown is primarily weakening the dollar. This situation presents a key opportunity, as the suspension of important data releases, including the September jobs report, creates substantial uncertainty in the market. This lack of information often makes traders sell the currency of the affected government. This perspective is supported by the latest private-sector data released just before the shutdown. The ADP private payrolls report for September showed only 95,000 new jobs, which fell short of the expected 150,000. This reinforces concerns about a slowing economy. As a result, the VIX, a gauge of market fear, surged above 20 this week, indicating traders expect more volatility. We see a definite difference in central bank policies that should keep pushing the EUR/USD pair higher. Markets now predict a 99.4% chance of a Federal Reserve rate cut in October, while the European Central Bank is staying put. Lagarde’s comments suggest there is no urgency to ease policy, making the Euro more appealing. Looking back at the 35-day shutdown from late 2018 to early 2019, we notice a similar trend where initial dollar weakness occurred due to political uncertainty affecting sentiment. This historical example suggests the current dollar decline might continue if Congress remains at an impasse. We should prepare for this political stalemate to last at least a few weeks. Given the rising uncertainty and expected upward trend for the pair, we recommend buying EUR/USD call options. This strategy allows for potential profit as we move towards the 1.1850 resistance level in the coming weeks while limiting downside risk. Increasing implied volatility makes these options valuable for capturing potential price swings. The main risk to this forecast is a sudden resolution to the budget stalemate in Washington. If a surprising funding deal emerges, it could lead to a quick reversal, sending the US Dollar higher. Therefore, we must keep an eye on any signs of compromise between the White House and Congress. Create your live VT Markets account and start trading now.

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