S&P Global has lowered France’s credit rating from AA- to A+ because of ongoing budget issues, even though France has submitted a draft budget for 2025. This downgrade comes shortly after similar downgrades from Fitch and DBRS, resulting in France losing its AA- rating from two major credit agencies in just over a month. The political landscape in France has been rocky. Prime Minister Sebastien Lecornu narrowly avoided two no-confidence votes while making compromises on the 2023 pension reform to keep his position. Currently, the EUR/USD exchange rate has risen slightly by 0.07%, trading at 1.1660.

The Euro’s Influence

The Euro is the second most traded currency globally, used by 19 EU countries and making up 31% of foreign exchange transactions in 2022. The European Central Bank (ECB) manages the monetary policy for the Eurozone, adjusting interest rates to control inflation and stimulate economic growth. Factors like inflation, GDP, and trade balance significantly affect the value of the Euro. If inflation rises, the ECB may raise interest rates, which could strengthen the Euro. A strong economy and favorable trade balance can attract foreign investment, further boosting the currency. The downgrade by S&P was a crucial moment for the Eurozone’s sentiment. We are now witnessing the consequences of the political turmoil and the reversal of the 2023 pension reform. The budget uncertainty remains and continues to impact the market. This political risk is evident in the government bond market. The gap between 10-year French OATs and German Bunds has expanded to over 60 basis points, the highest level since the sovereign debt crisis. This indicates that investors expect a higher return for holding French debt because of the fiscal worries raised by the downgrade.

Economic Outlook and Trading Strategies

Recent economic data shows a slowdown, which should influence our trading strategies. The latest flash Eurozone PMI composite reading for October 2025 was 49.1, indicating a contraction mainly due to weaknesses in France and Germany. This poor growth complicates the ECB’s decision-making. The ECB faces a tough choice as its next meeting approaches. In September, Eurozone HICP inflation was at a stubborn 2.7%, still above the 2% target. However, weak growth data makes additional rate hikes unlikely. The market now sees only a 15% chance of another hike this year, down from over 50% just two months ago. Given this uncertainty, we can expect increased volatility in EUR/USD in the coming weeks. Implied volatility for one-month options has risen from 7% to 8.5% in the last ten days. Traders might want to consider buying straddles or strangles to profit from a potential sharp move in either direction as the market reacts to mixed signals on inflation and growth. The most likely direction for the Euro seems to be downward, especially against the US dollar. With the Federal Reserve sticking to a “higher for longer” policy, the interest rate gap continues to favor the dollar. We can capitalize on this by buying EUR/USD put options or taking short positions in futures contracts, aiming for a drop below the 1.1400 support level. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now