The EUR/USD pair continued its downward trend on Friday, hovering around 1.1560, following a brief recovery towards 1.1590. This movement reflects market sentiment that favored the U.S. dollar, driven by increased political uncertainty in Europe and a general shift towards safer assets. The euro has depreciated over 1.4% this week, representing its most significant weekly decline of 2025, driven by internal political strife in France and underwhelming industrial data from Italy, which eclipsed a slight enhancement in Germany’s trade surplus. At the same time, the U.S. Dollar Index rose to approximately 99.26, achieving a weekly increase of 1.7%, marking its most significant rise in almost a year. This movement reflects traders shifting back to the greenback in anticipation of crucial U.S. consumer confidence data and ongoing uncertainty related to the U.S. government shutdown.
The resignation of French Prime Minister Sébastien Lecornu has heightened pressure on the euro, reigniting political volatility in one of the Eurozone’s largest economies. Markets are currently anticipating President Emmanuel Macron’s selection of his sixth prime minister, a procedure that has revealed significant divisions within the National Assembly and heightened worries regarding France’s fiscal path. Macron faces the challenge of implementing a stricter budget in the face of increasing public dissent, raising concerns about potential delays in reforms and additional fiscal deterioration. The potential for another early parliamentary election or coalition reshuffle has heightened risk aversion among European assets, prompting investors to favor the U.S. dollar while distancing themselves from euro-denominated instruments. The current uncertainty has negatively impacted bond market stability, as evidenced by French 10-year yields surpassing 2.95%, while German yields decreased to 2.61%. This has resulted in the Franco-German spread widening to its most significant level in six months, indicating an increasing regional divergence. Germany’s trade surplus expanded to €17.2 billion in August, exceeding expectations of €15.1 billion, which confirms a strong export performance. In contrast, Italy’s industrial production fell by 2.4%, marking its most significant monthly contraction this year. The difference between the bloc’s northern and southern economies has once again underscored structural imbalances within the Eurozone. Germany’s exports experienced a positive impact from consistent demand in machinery and automotive components.
In contrast, Italy faced challenges with high energy costs and weak manufacturing output, indicative of the wider economic slowdown affecting southern Europe. The data highlighted the European Central Bank’s challenge — inflation is inconsistent, with headline CPI at 2.6%, while growth momentum is weakening, leading to a division among policymakers regarding the suitability of further easing or an extended pause. The ECB’s September minutes indicated “divergent inflation expectations” among members, with no immediate urgency to adjust policy. However, traders are now factoring in a 25 bp cut by December, particularly if the euro continues to face downward pressure. The dollar’s resurgence this week can be attributed to a blend of domestic and international factors. The political instability in France, coupled with Japan’s cabinet transition led by Sanae Takaichi, has increased the demand for the U.S. dollar as a safeguard in global reserves. As the U.S. government shutdown delays the release of significant data, traders are redirecting their attention to high-frequency indicators such as consumer sentiment and inflation expectations. The University of Michigan Consumer Sentiment Index is anticipated to decrease to 54.2 in October, down from 55.1 in September, indicating a third consecutive month of decline as households contend with escalating costs and uncertain economic outlooks. Yet, paradoxically, these soft data have not led to a depreciation of the dollar, as safe-haven positioning and constrained liquidity have supported defensive flows into Treasuries and the greenback. The 10-year Treasury yield decreased to 4.09%, whereas the 2-year remained close to 4.31%, maintaining a slight inversion that indicates recession risk while simultaneously bolstering dollar demand in global carry trades.
From a technical perspective, EUR/USD is currently confined within a clearly established bearish channel that initiated in mid-September. The pair has fallen below the critical support level of 1.1600, continuing its decline towards 1.1540, marking its lowest point since August 5. Short-term momentum indicators indicate a downside bias, as the Relative Strength Index remains around 35, suggesting near-oversold conditions, though a clear reversal has not yet materialized. The 50-day and 200-day exponential moving averages are positioned at 1.1666 and 1.1698, respectively, indicating a strong level of overhead resistance. Immediate resistance is positioned at 1.1575, succeeded by 1.1650, where previous support has transitioned into a selling area. On the downside, persistent trading beneath 1.1540 could lead to a decline toward 1.1470, and a subsequent breach may reveal the August 1 low around 1.1395. Traders are exercising caution regarding any potential rebound attempts, perceiving rallies as chances to reinitiate short positions in light of ongoing euro weakness.