The EUR/USD pair dropped on Tuesday, influenced by political instability in France amid a U.S. government shutdown. The U.S. Dollar Index (DXY), which had been sliding, surprisingly rebounded by 0.52% during the day. Currently, the pair sits at a 0.46% decline, trading at 1.1654.
Impact of France’s Fiscal Crisis and Fed’s Policies on the Euro
The euro has struggled to surpass a key resistance level, aiming for its yearly high of 1.1918, largely due to the situation in France. The resignation of Prime Minister Lecombe has put the country’s 2026 budget at risk, complicating efforts to stabilize finances amid political challenges.
If a budget isn’t approved, France’s parliament might enact a temporary law allowing the government to use spending from 2025, potentially averting a government shutdown similar to the one in the U.S. However, this remains a stopgap, as Congress needs to ultimately agree on a budget.
In the U.S., economic indicators included the New York Fed’s Survey of Consumer Expectations (SCE), revealing that consumers anticipate price hikes over the coming year. Moreover, the RealClearMarkets/TIPP Economic Optimism Index showed a decline in October.
Kashkari of the Fed Highlights Stagflation Risks; Milan Calls for Forward-Thinking Policies
Minneapolis Fed President Kashkari conveyed a moderately hawkish stance, mentioning that it’s premature to judge the long-term effects of tariffs on inflation. While he noted optimism about the labor market, he also pointed out hints of stagflation in recent data.
Federal Reserve President Stephen Milan emphasized that economic growth in the year’s first half fell short of expectations, advocating for a proactive monetary policy, given the delayed effects of prior tightening.
Germany’s Bundesbank reported a decrease in factory orders for August, despite some signs of improvement.
Market Trends: Overall USD Strength Affects the Euro
- Minneapolis Fed President Kashkari expressed doubts that a few rate cuts would significantly lower mortgage rates, warning of the possibility of sharp inflation increases if they did.
- The New York Fed SCE indicated median inflation expectations for the next year climbed from 3.2% to 3.4%, while for five years, it moved from 2.9% to 3%. It remained stable at 3% over a three-year span.
- Predictions for earnings growth dropped by 0.1% to 2.4% according to the survey.
- The RCB/TIPP Economic Optimism Index slid from 48.7 in September to 48.3 in October, showing continued pessimism as it stays below the neutral threshold of 50.
- Market sentiment suggests a 94% chance the Fed will reduce interest rates by 25 basis points at its meeting on October 29th.
- European Central Bank President Christine Lagarde expressed confidence in France meeting the budget deadline, asserting that the euro must play a more significant global role, criticizing the eurozone as merely reactive to shocks from the U.S.
- German factory orders in August saw a month-on-month drop of 0.8%, although it was better than the 2.7% drop in July, falling short of the anticipated 0.2% growth. Year-on-year, orders improved from -3.3% to 1.5%.
Technical Analysis: EUR/USD Falls Below 1.1700
The EUR/USD concluded Tuesday’s session beneath the 1.1700 mark, signaling potential further declines. The Relative Strength Index (RSI) has turned bearish, indicating that sellers dominate.
The initial support level can be found at the 100-day simple moving average (SMA) at 1.1628. Should this level be breached, subsequent support appears at 1.1600, with the possibility of losses stretching toward the August 27 low of 1.1574. Beyond this, further movements could lower to 1.1391.
Conversely, the first resistance level is identified at 1.1700, with significant resistance points at 1.1760, 1.1800, and the July 1 high of 1.1830.
