The Euro has dropped for a third consecutive day, nearing 1.1600, amid a political deadlock in France and rising concerns about US government funding. As the Euro struggles, the Dollar is gaining traction due to risk-averse sentiments, with the EUR/USD trading at 1.1635 at this time. French President Macron faces increasing pressure for a snap election, and credit downgrades are possible if the political chaos continues. In the US, Senate leaders are making little progress on government funding, showing only a 23% chance of resolution this week, which is affecting market mood.

Impact Of Political Issues

The Euro is weighed down by France’s political troubles and the US government shutdown, keeping bearish trends strong. Former French Prime Minister Lecornu’s comments provide slight relief for the Euro, but ECB President Lagarde states that disinflation has already occurred in the Eurozone. Discussions at the US Federal Reserve are divided over inflation concerns and policy paths. German factory orders fell by 0.8% in August, but rose 1.5% year-on-year, reflecting ongoing economic hurdles in Europe. Technically, the EUR/USD is near the support level of 1.1610, with RSI and MACD indicators suggesting further decline. Key support and resistance levels at 1.1610 and 1.1720 shape the Euro’s potential movement. With pressure on the EUR/USD increasing, we are considering strategies that could benefit from a further drop. The political issues in both France and the US are clearly creating a downward trend for the pair. This situation is suitable for buying put options on the Euro or selling EUR/USD futures.

Pressure On The Euro Due To Political Uncertainty

The political uncertainty in France is significantly impacting the Euro, and it’s more than just talk. France’s 10-year bond spread over German bunds has widened to 85 basis points, a level seen during the stressful 2017 election period. This indicates traders are factoring in higher risk, making long positions in the Euro less appealing. Meanwhile, the US Dollar is gaining strength as a safe haven due to the government shutdown. The 16-day shutdown in October 2013 cut an estimated 0.6% from Q4 GDP growth, and a prolonged shutdown now could have a similar cooling effect. Ironically, this immediate risk is driving demand for the Dollar, which is unfavorable for the Euro. The upcoming FOMC minutes are a significant factor that could push the pair below current support levels. With recent US Core PCE inflation still high at 2.8%, any hawkish signals in the minutes would likely boost the Dollar further. In contrast, with Eurozone HICP at 2.1%, President Lagarde has little reason to adopt a hawkish stance for the Euro. From a technical perspective, the pair is testing a crucial support level at 1.1610. A decisive break under this level could prompt more selling towards 1.1575. We could use the 1.1610 level as a signal point, possibly buying put options with a 1.1550 strike price expiring in the coming weeks to take advantage of a potential breakdown. Create your live VT Markets account and start trading now.

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