The Fed is awaiting data and is set to cut rates. The ECB may surprise and increase borrowing costs. Coupled with a reduction in political risks in France, the EURUSD pair has received support. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- France may approve the budget.
- The Fed is ready to cut rates.
- The ECB might surprise the market with a rate hike.
- Long trades on the EURUSD pair can be opened on a breakout of 1.166.
Weekly Euro Fundamental Forecast
A glimmer of hope in France, along with the rapid recovery of US stock indices, allowed the EURUSD pair to gain traction. The optimism of outgoing Prime Minister Sébastien Lecornu regarding budget negotiations with political parties, his willingness to raise the deficit from 4.7% to less than 5% of GDP, and the announcement by Emmanuel Macron’s office that a new prime minister would be chosen within 48 hours eased jitters among investors. The yield spread between French and German bonds narrowed, and the euro surged.
French-German 10-Year Bond Yield Spread
Source: Bloomberg.
In fact, Sébastien Lecornu’s optimism may be worthless. French parties have a strong sense of their own power. The fifth head of government risks resigning as quickly as his predecessor. Perhaps parliamentary or presidential elections could reassure investors more than another prime minister.
Political uncertainty is damaging the economy. The slowdown in GDP could force the ECB to come to its aid. The derivatives market is now betting that the European Central Bank will ease monetary policy three times in 2026. The odds are estimated at 1%.
In fact, Christine Lagarde has long since made all the decisions. The ECB has ended the cycle of monetary expansion. Moreover, José Luis Escrivá, the Governor of the Bank of Spain, said that a rate hike should not be ruled out. If everything is not going well in Paris, then everything is working out very well in Madrid.
The different pace of monetary policy between the ECB and the Fed is a key driver behind the upward trend in the EURUSD pair. According to the minutes of the September FOMC meeting, officials recognize the risks of a cooling labor market and are prepared to continue lowering rates. The derivatives market indicates a 79% probability of two rate cuts in 2025.
However, Barclays notes that hedge funds are bullish on the US dollar towards the end of the year. They say that the volume of forward contracts to sell the EURUSD pair is three times higher than the volume of purchases. However, the issue lies in the hedging of currency risks when non-residents purchase the S&P 500 index. The US is far ahead of Europe in terms of the stock market performance, and the euro is rising thanks to risk hedging.
EURUSD Performance and S&P 500-EURO Stoxx 600 Ratio
Source: Nordea Markets.
As a result, the major currency pair has become increasingly sensitive to the broad US stock index. As long as investors continue to buy the S&P 500 index on corrections, the euro will remain immune to the French crisis. The strengthening of the regional currency is hindered by the shutdown. It prevents the Fed from obtaining the data it needs to continue its cycle of monetary expansion.
Weekly EURUSD Trading Plan
The strategy of buying the EURUSD pair on pullbacks with a target of 1.159 proved successful. A breakout above the resistance level of 1.166 will allow traders to increase long positions on the major currency pair.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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