The EUR/USD pair weakened, breaking a three-day winning streak. This decline came as the US Dollar gained strength after President Trump softened his stance on US-China trade tensions. The EUR/USD was trading at around 1.1663, down from earlier highs. At the same time, the US Dollar Index stabilized at about 98.50 after some initial drops. Trump mentioned that his proposed 100% tariffs on Chinese imports were not sustainable, which helped reduce market worries. The World Trade Organization (WTO) has warned that ongoing trade tensions could lower global GDP by as much as 7% over time. The Federal Reserve is likely to cut rates by 25 basis points twice, once in October and again in December, according to the CME FedWatch tool. Additionally, the US government shutdown raises wider fiscal concerns. In the Eurozone, sentiment improved after the French Prime Minister survived two no-confidence votes.

Eurozone Inflation Data

Eurozone inflation data showed stability, with core and headline HICP reporting minor monthly and annual increases. The European Central Bank (ECB) remains cautious, noting the economy’s resilience. Despite the US Dollar’s temporary rise, regional banking issues and ongoing geopolitical tensions add uncertainty. The US Dollar saw its strongest gains against the British Pound, with a 0.28% increase. The US Dollar’s rise seems temporary, driven more by changes in sentiment than shifts in policy. We view the current dip in EUR/USD below 1.1700 as a potential buying opportunity rather than a change in trend. The market is giving us a better price to anticipate expected dollar weakness in the coming weeks. The underlying fundamentals still suggest a weaker dollar. Markets fully expect a 25 basis point Fed rate cut later this month, plus another in December. The latest US Core PCE number for September was 2.8%, just below expectations, reinforcing the belief that the Fed is likely to ease policy. These rate cuts are the main story, overshadowing daily trade headlines.

Growing Domestic Risks

We should not overlook the increasing domestic risks in the US, such as the ongoing government shutdown and signs of trouble in regional banks. This situation reminds us of early 2023, when the Fed had to step in with emergency support. These issues pose significant challenges for the US Dollar that a single positive comment on trade cannot resolve. In contrast, the Eurozone appears more stable, with the ECB maintaining its current stance and political risks in France easing. Eurozone inflation remains steady around 2.2%, giving the ECB little reason to act urgently. This contrasts sharply with the dovish pressures facing the Fed and should provide a solid foundation for the EUR/USD pair. For those trading derivatives, buying call options on EUR/USD with November or December expirations could be a smart strategy, taking advantage of the expected return to a declining dollar trend. The Cboe Volatility Index (VIX) has dropped to 19 from its recent highs, making options potentially cheaper to buy now. We believe that the fundamental reasoning for a weaker dollar will return as the noise from trade discussions diminishes. Create your live VT Markets account and start trading now.

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