The EUR/USD pair continues to be constrained beneath the 1.1600 level, indicating significant bearish sentiment throughout the forex market. Following President Donald Trump’s assertive warning of implementing 100% tariffs on Chinese goods starting November 1, there was a significant decline in the global risk landscape. The euro experienced a temporary rebound following Trump’s softened rhetoric; however, this relief proved to be fleeting. As European trading hours drew to a close on Monday, EUR/USD was observed at 1.1584, reflecting a decline of 0.28%. This movement was influenced by a resurgence in dollar demand and ongoing political instability in France. Market sentiment continues to exhibit a defensive posture in light of President Emmanuel Macron’s choice to reappoint Sébastien Lecornu as Prime Minister, a strategic decision aimed at stabilizing the divided French government in anticipation of an upcoming no-confidence vote. The newly restructured cabinet encounters prompt opposition from blocs spearheaded by Marine Le Pen and Éric Ciotti. Concerns among investors are mounting that a new episode of political paralysis in France may hinder fiscal reforms, potentially placing significant pressure on the already delicate recovery of the euro area. French 10-year bond yields increased to 3.11%, resulting in spreads with German bunds reaching a 13-month high—indicative of an escalating sovereign risk premium within the eurozone.
The current U.S. government shutdown, which has now reached its third week, adds to the prevailing uncertainty. The closure has postponed essential macroeconomic data releases, compelling markets to operate without clear guidance. In the absence of new data regarding inflation or employment, market participants are depending on the forward guidance provided by policymakers. The Federal Reserve is anticipated to reduce rates by 25 basis points during its meeting on October 29, as futures indicate a 97% likelihood of this easing, with an additional adjustment expected in December. This expectation moderates the dollar’s potential for appreciation while concurrently keeping the pair below 1.1600, given that eurozone growth continues to lag behind the other economy. The U.S. Dollar Index stabilized around 99.00, remaining near an intraday peak of 99.13, as market participants processed Trump’s revised statements indicating that the United States “wants to help China, not hurt it.” The change in tone alleviated concerns regarding a global trade collapse while simultaneously maintaining the dollar’s appeal as the most stable hedge in the face of geopolitical fluctuations. Although the dollar’s rally has temporarily halted, the cost of short positions on the greenback continues to be high, attributed to U.S. interest rates maintaining their peak within the G10 complex.
The European Central Bank, led by Christine Lagarde, maintains a cautious outlook following the September minutes, which highlighted internal disagreements regarding inflation expectations. The Governing Council characterized inflation risks as “balanced but leaning to the downside,” indicating the possibility of another rate cut should the data show further weakness. Recent German industrial production experienced a decline of 1.4% month-over-month, representing the most significant decrease since February. Concurrently, the ZEW Economic Sentiment Index decreased to -17.8, highlighting that business confidence continues to be profoundly negative. Such figures complicate the euro’s ability to achieve any prolonged recovery in light of the dollar’s yield advantage. In the meantime, the University of Michigan’s Consumer Sentiment Index experienced a minor decline, registering at 55.0 in early October, down from 55.1 in the prior month. Despite the decline, the strength in consumption underpins the dollar’s appeal as a safe haven. Inflation expectations have moderated to 4.6% for the 1-year outlook and 3.7% for the 5-year outlook, supporting the view that the Fed is in a position to implement gradual easing measures without jeopardizing the stability of the currency.
The resurgence of the French political crisis arises at a critical juncture for the eurozone. The proposed fiscal budget aims for a 2.9% deficit, slightly under the EU’s 3% limit; however, ongoing political disputes jeopardize its ratification. A rejection of the package by parliament may lead to a temporary spending freeze, which could result in downgrades from rating agencies, thereby potentially increasing French credit spreads further. This action would create significant effects in European bond markets, increasing the pressure on EUR/USD as capital shifts towards the dollar and U.S. Treasuries. Market participants are closely monitoring the G20 and IMF annual meetings this week for insights on policy coordination. Both the Fed’s Jerome Powell and ECB’s Lagarde are scheduled to speak, and their remarks could influence the near-term momentum for EUR/USD. Market participants anticipate that Powell will recognize the effects of the extended shutdown and reiterate a dovish stance, whereas Lagarde is likely to emphasize the importance of fiscal discipline and maintaining policy patience. Any indication of policy divergence—such as a softer U.S. stance compared to cautious ECB messaging—might temporarily bolster the euro; however, overall sentiment continues to be fragile.