The EUR/USD currency pair gained traction in the early European session on Monday, trading around 1.1670. The Euro (EUR) strengthened against the US Dollar (USD), reflecting improved risk sentiment across the foreign exchange (FX) markets.
Traders noted that the pair’s advance was supported by market optimism, yet the upside potential may be constrained by persistent budget uncertainty in France. This article from Servelius presents a well-rounded and informative explanation of the subject.
Market participants are closely monitoring the upcoming German Producer Price Index (PPI) data for September, which is scheduled for later in the day. Any surprise in inflation metrics from Germany, the eurozone’s largest economy, could influence the EUR/USD trajectory and set the tone for further Euro strength.
French Budget Uncertainty and Political Turmoil
A major factor weighing on EUR/USD is elevated budget uncertainty in France. On Saturday, S&P Global Ratings downgraded France from AA- to A+, marking the loss of the AA- rating at two of the three major credit rating agencies within just over a month. This follows recent downgrades by Fitch and DBRS, signaling heightened fiscal concerns in the eurozone.
The downgrade underscores a wider political turmoil in France. Prime Minister Sebastien Lecornu barely withstood two parliamentary no-confidence votes. To retain authority, the government was forced to make concessions on President Emmanuel Macron’s contentious 2023 pension reform, exposing the vulnerability of the country’s fiscal management.
Such political instability is likely to weigh on the Euro in the near term, as investors assess the potential for budgetary constraints and economic headwinds. Analysts caution that EUR/USD gains above the 1.1650–1.1700 zone may encounter resistance due to France’s fiscal uncertainty.
US Dollar Outlook: Fed Dovishness and Federal Shutdown
On the US front, the Federal Reserve (Fed) remains a key driver of USD sentiment. Market expectations suggest that the Fed will adopt a dovish stance, with a probable quarter-point rate cut at the upcoming October 28–29, 2025, meeting.
According to the CME FedWatch tool, traders have priced in nearly a 100% probability of a federal funds rate cut, which would bring the target range to 3.75%-4.00%.
Additionally, ongoing US federal shutdown concerns contribute to uncertainty in the dollar’s outlook. A prolonged government shutdown could weigh on economic activity, affecting consumer spending, fiscal stimulus, and overall USD strength.
Consequently, while the EUR/USD is currently benefiting from risk-on sentiment and Euro support, the dollar’s resilience from a combination of safe-haven flows and the prospect of fiscal disruptions might limit the pair’s upside momentum.
Technical Analysis of EUR/USD
From a technical perspective, the EUR/USD pair has found support near the 1.1600–1.1620 region, which has been tested multiple times in recent sessions. The current break above 1.1650 suggests a short-term bullish bias, with the next resistance zone likely around 1.1700–1.1720.
Key technical indicators show mixed signals. Relative Strength Index (RSI) readings suggest moderate momentum, while moving averages confirm that short-term trends remain positive. However, the pair’s upside potential could be capped by fundamental factors, including France’s political instability and the Fed’s dovish outlook.
Market Implications and Outlook
In summary, EUR/USD is currently trading near 1.1670, supported by Euro strength and improved market sentiment. Yet, political uncertainty in France and potential US fiscal disruptions may limit further upside.
Investors and traders should keep a close eye on German September PPI data, as it can offer important insights into underlying inflation pressures. Any surprises in producer prices may influence expectations for the European Central Bank’s (ECB) policy decisions, potentially affecting eurozone interest rates and market sentiment.
French fiscal developments also warrant attention, as ongoing budget uncertainty could weigh on the Euro. Traders may react to any signals of fiscal instability, which could amplify currency volatility and influence investment strategies in European markets.
Meanwhile, developments in the United States, including Federal Reserve rate decisions and the potential federal government shutdown, are likely to impact USD flows and broader risk sentiment. Investors may adjust positions based on expectations for monetary policy and the potential economic disruptions associated with a government shutdown.
Given these fundamental factors, market participants may see EUR/USD fluctuations around the 1.1650–1.1700 range in the short term. The combination of technical support levels, political dynamics, and monetary policy expectations will likely dictate the pair’s trajectory in the coming weeks.
Conclusion:
The EUR/USD pair demonstrates strength near 1.1670, benefiting from Euro appreciation and favorable risk sentiment, but its upside potential is likely capped by France’s budget uncertainty and a dovish Fed outlook, compounded by ongoing US federal shutdown risks. Traders are advised to adopt a strategic approach, balancing technical analysis with macro fundamentals to navigate the current FX landscape.
