The eurozone calendar is clear until Friday’s PMI report, so the EUR/USD rate will mainly depend on US credit market sentiment. Right now, the EUR/USD is around its short-term fair value of 1.167, even with some recent increases. Last week, the euro was slightly undervalued because of worries about US lending conditions and expectations for a more accommodating Federal Reserve. The gap between EUR:USD two-year swap rates shrank to 104 basis points but widened again to 110 basis points after Friday’s market reassessment. Still, it’s 4-5 basis points closer than a week ago and 7-8 basis points tighter than at the start of October.

Current Economic Conditions

French politics have stabilized a bit, which is helping the euro, but uncertainty remains. S&P downgraded France from AA- to A+ last Friday, even after proposals for reducing deficits and delays in pension reform complicated matters. The fragility of the French government makes it tough to predict a full recovery for the euro, especially as budget discussions heat up. This week, all eyes will be on the US. If credit sentiment worsens, EUR/USD could rise to 1.180. The FXStreet Insights Team, made up of journalists and analysts, reviews market thoughts from various experts for their reports. In the coming weeks, we should focus on the United States since signs of stress in the US credit market are the main factor affecting EUR/USD. Any further decline in US credit sentiment could weaken the dollar, as the market anticipates a more dovish Federal Reserve, pushing the currency pair closer to 1.180. Recent data shows this strain. For instance, the Markit CDX North American Investment Grade Index, an important indicator of credit risk, has widened by over 15 basis points in the last two weeks. This reflects rising concerns and aligns with market predictions of a higher chance of a Fed rate cut in the first quarter of 2026.

Potential Trading Strategies

Given this outlook, traders might think about buying EUR/USD call options to take advantage of potential gains while limiting risk. A call option with a strike price of 1.1750 and an expiry in mid-November could be a smart move for capitalizing on possible upward movement. This strategy allows for potential gains if US credit fears grow while protecting against sudden downturns. However, we must keep in mind the ongoing risks in France that might limit the euro’s strength. S&P’s surprise downgrade of French debt on October 17 is a fresh reminder of the country’s financial issues. The upcoming budget talks are a significant challenge and could hinder euro growth. We observed a similar situation in spring 2023 when concerns about US regional banks led to a quick change in Fed expectations. During that time, the EUR/USD jumped from about 1.05 to over 1.10 within weeks as the dollar weakened. The current situation bears some resemblance to that time, indicating a similar outcome could occur. For now, the focus should be on the two-year swap rate spread between the euro and the US dollar. This gap has tightened this month, and if it continues to decrease from its current level of 110 basis points, it will confirm the trend of a weakening dollar. A drop towards 100 basis points would signal strong bullish momentum for our perspective. Create your live VT Markets account and start trading now.

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