The Euro (EUR) is carefully trading with a slight dip of 0.1% against the US Dollar (USD), nearing Wednesday’s low of around 1.16. This drop in the Euro is due to surprising declines in German trade data for August, hinting at a potential slowdown in the eurozone’s economy. The recent drop in German exports follows weak industrial production figures, indicating further economic issues. Despite these challenges, yield spreads remain steady, and comments from the European Central Bank are neutral. Meanwhile, there is uncertainty in France’s political landscape, as President Macron is expected to choose a new Prime Minister by Friday.

Narrowing Yield Spread

The narrowing yield spread between France and Germany for 10-year bonds shows growing confidence in Macron’s ability to form a cabinet before the October 13 budget deadline. The Euro remains on the defensive near 1.16, with a Relative Strength Index below 40 indicating a slight bearish trend. Support levels are limited between 1.16 and the early August low of below 1.14, with expected movement between support at 1.16 and resistance at 1.1650. These insights come from commercial and internal analysts, with expert analysis from Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret. We are experiencing familiar pressure on the Euro, driven by renewed weakness in the German economy. The latest August data reveals a surprising 0.8% drop in German exports, following disappointing industrial production figures from the last quarter. This signals that the eurozone’s economic core is facing significant challenges. For traders, this suggests it may be wise to buy puts on the EUR/USD. With the pair struggling to maintain the 1.07 level, considering strikes around 1.06 or 1.05 for November expirations could be a smart move. Implied volatility has increased to 7.2%, as traders anticipate a greater likelihood of downward movement.

Bearish Play Strategy

A conservative strategy could be to use a bear put spread, which limits your risk if the market stays steady. For example, buying a put with a 1.06 strike while selling another at a 1.04 strike helps define your potential profit and loss. This approach fits well in a market with moderate bearish momentum rather than a sharp decline. We are also monitoring the France-Germany 10-year yield spread, which has widened by 5 basis points this week, unlike the narrowing we observed during similar uncertain times in 2017. While ECB comments remain neutral for now, the interest rate swaps market is predicting a 40% chance of a rate cut in the first quarter of 2026. This change in expectations contributes to the bearish sentiment surrounding the Euro in the weeks ahead. Create your live VT Markets account and start trading now.

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