EUR/USD sees moderate gains, trading around 1.1735 during Thursday’s Asian session. Concerns about the US government shutdown pressed down the US Dollar. The release of the US weekly Initial Jobless Claims is postponed due to the shutdown.
The US government shut down after a Congressional deadlock on funding, hindering the release of key economic data like the September employment report. The Trump administration froze $26 billion, affecting Democratic-led states. The CME FedWatch tool suggests a 99.4% likelihood of a 25-basis-point rate cut by the Fed in October, a rise from 96.2%.
Eurozone Inflation And ECB Stance
The US Supreme Court will hear arguments in January on Trump’s attempt to dismiss Fed Governor Lisa Cook. ECB President Christine Lagarde mentioned no urgent threat to euro-area inflation, and the ECB is not rushing to alter borrowing costs, supporting the Euro.
The Euro is the currency for the Eurozone and holds 31% of global foreign exchange transactions. High Eurozone interest rates generally benefit the Euro. Economic performance and inflation data significantly influence the Euro’s value.
The Trade Balance also affects the Euro’s strength. A positive balance strengthens it, while a negative one weakens it. The four largest Eurozone economies play a crucial role, contributing 75% of the region’s economy.
USD Weakness And Market Opportunity
With the EUR/USD trading above 1.1700, the US government shutdown is the main driver weakening the dollar. We see this as a key opportunity, as the halt in crucial data releases, including the September jobs report, is creating significant market uncertainty. This information vacuum often leads traders to sell the currency of the affected government.
This view is supported by the latest private-sector data, which we saw just before the shutdown began. The ADP private payrolls report for September came in at a disappointing 95,000, falling short of the 150,000 that was expected, reinforcing fears of a slowing economy. Consequently, the VIX, a key measure of market fear, has surged past 20 this week, indicating that traders are pricing in higher volatility.
We see a clear divergence in central bank policy that should continue to push the EUR/USD pair higher. Markets are now pricing in a 99.4% probability of a Federal Reserve rate cut in October, while the European Central Bank remains on hold. ECB President Lagarde’s comments suggest no rush to ease policy, making the Euro more attractive.
Looking back at the 35-day shutdown in late 2018 and early 2019, we recall a similar pattern of initial dollar weakness as political uncertainty dragged on sentiment. That historical precedent suggests the current dollar downturn could have legs if Congress remains deadlocked. We should prepare for this political gridlock to last for at least a couple of weeks.
Given the rising uncertainty and expected upward trajectory for the pair, we believe buying EUR/USD call options is a prudent strategy. This allows for profiting from a potential move towards the 1.1850 resistance level in the coming weeks while capping downside risk. Rising implied volatility makes these options valuable instruments for capturing the expected price swings.
The primary risk to this outlook is a sudden resolution to the budget impasse in Washington. A surprise funding deal would likely cause a sharp reversal, sending the US Dollar higher across the board. Therefore, we must closely monitor any signs of a potential compromise between the White House and Congress.
