The EUR/USD exchange rate climbed above 1.1670 after falling from a peak of 1.1730 during the earlier Asian session. The Euro dropped following the unexpected resignation of France’s Prime Minister, Sébastien Lecornu, which has triggered a political crisis in France. In the U.S., efforts to fund the Federal Government failed in the Senate, resulting in a second week of government shutdowns and potential layoffs for federal workers. Meanwhile, the Eurozone reported a 0.1% increase in retail sales for September. Today, the Kansas City Federal Reserve President’s conference is notable.

Euro Faces Challenges Amid Political Crisis

The Euro is struggling due to the political chaos in France, where a snap election could impact its stability. In Japan, the new Prime Minister’s push for stimulus is affecting monetary policy expectations and the Yen’s value. The Federal Reserve has varied opinions on monetary policy, but many expect a rate cut by the end of the month. The EUR/USD is facing heavy selling pressure, hovering near the 1.1645 support level. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) show bearish signals, with potential resistance at 1.1685 and 1.1730. Speeches from ECB President Christine Lagarde and Fed’s Jeff Schmid are expected, which could influence the Euro and U.S. Dollar. Given France’s political turmoil, we anticipate ongoing weakness in the Euro. The resignation of a fifth prime minister under Macron indicates significant instability that is likely to overshadow stable economic data. This creates pressure on the EUR/USD pair. The situation in France resembles the uncertainty before the 2017 presidential election, where fears of a populist victory impacted the Euro. Political risk is now the main concern for the Euro, leaving it open to further declines. Traders in derivatives should prepare for a downward move, as markets factor in the possibility of a snap election.

Investors Seek Safety

To support this perspective, we see the gap between French and German 10-year government bonds widening, now over 55 basis points. This trend suggests investors are moving from French debt to safer German bunds, a sign that often precedes further Euro weakness. This spread will be a key indicator in the coming days. On the other side, the U.S. government shutdown, while noisy, is unlikely to boost the Euro. During the prolonged shutdown of late 2018 and early 2019, the U.S. Dollar Index (DXY) remained stable and even gained slightly due to global growth concerns. We expect that the market’s focus will stay on the Federal Reserve’s policy instead of temporary government issues. Market expectations indicate a 95.7% probability of a Fed rate cut this month, which will cap the dollar’s strength. While the dollar is not expected to collapse, its potential for a strong rally is limited. Thus, the easiest path for EUR/USD is downward, exacerbated by Europe’s acute crisis. In the upcoming weeks, it might be wise to buy put options on EUR/USD to capitalize on a continued decline while setting a maximum risk. Targeting strikes below the 1.1645 support level, such as 1.1600 or 1.1550, is sensible. These positions will benefit from both the anticipated drop in price and a likely increase in implied volatility. Speeches from ECB President Lagarde and Fed President Schmid today pose significant risks. If Lagarde takes a dovish stance, acknowledging the French political crisis, it could drive the Euro lower. Traders could consider long straddles to manage volatility around these speeches if the direction is uncertain, but our main view remains that the Euro is bearish. Create your live VT Markets account and start trading now.

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