The shadow of French debt and the US government shutdown resonate: Is the euro completely doomed to fail?
2025-10-08 17:21:09
On Wednesday (October 8th), the euro extended its three-day losing streak against the dollar, hitting a new low since early September, trading above 1.16 during the European session. This move was primarily driven by two factors: in Europe, political and fiscal uncertainty in France intensified; in the United States, the federal government shutdown entered its second week, with neither party in the Senate having a plan to reopen it. Increased risk aversion benefited the dollar, putting pressure on risky assets overall, and driving the euro's short-term decline against the dollar.
Uncertainty is growing in France. Pressure on the president to hold early elections is intensifying, with some former allies aligning with the opposition to demand a quick election or resignation. Rating agencies warn that if the political deadlock drags on, France's sovereign credit rating remains at risk of a downgrade. The turbulent political landscape has increased risk premiums, putting the euro under inherent pressure.
US politics are also turbulent. Senate Democratic and Republican leaders have yet to find a path to restoring funding, and the shutdown has entered its second week. Market confidence in a breakthrough this week has waned. As expectations of a functional government weaken, global risk appetite has cooled, leading to a surge in demand for the safe-haven dollar and traditional safe assets, and the euro has been squeezed against the dollar.
On the macroeconomic calendar, the most closely watched event of the day was the Federal Reserve meeting minutes. During the European session, several ECB officials, including President Christine Lagarde, spoke, and several Fed officials also attended events during the US session. Although Lagarde reiterated on Tuesday that "the eurozone's deflation process is complete" and expressed "confidence" that France will submit its budget on schedule, her words were unable to overcome the market's immediate discounting of political and fiscal issues.
Data also failed to support the euro. Factory orders in Germany, the eurozone's leading economy, fell 0.8% month-over-month in August, contrary to market expectations of a 1.4% increase and following a -2.7% contraction in July. Year-over-year growth rebounded to +1.5% from -3.3% in July, but this marginal improvement is insufficient to reverse short-term economic weakness. The volume-driven nature of orders suggests that future industrial output and external demand will remain weak, limiting fundamental support for the euro.
Policy divergence exacerbates uncertainty. The hawk-dove debate within the Federal Reserve continues: Minneapolis Fed President Neel Kashkari warns that "a too-rapid rate cut could trigger inflation," while Stephen Miran, President Trump's latest appointee to the Fed Board, emphasizes that "inflation is linked to population growth and monetary policy needs to be loosened." With no consensus on the inflation path, if the minutes indicate a protracted period of restrictive levels, the dollar's interest rate differentials and term premiums will continue to support it.
In summary: French political/fiscal uncertainty + tail risk of the US shutdown → lower risk appetite → the US dollar is supported by both safe-haven and interest rate differentials → the euro is under further pressure against the US dollar; and in the short term, there is a lack of major data that can quickly reverse this framework, and the bearish trend has the conditions to continue.
On the daily chart, the lower Bollinger Band is 1.1617, the middle Bollinger Band is 1.1729, and the upper Bollinger Band is 1.1842. After three consecutive declines, the exchange rate is running close to the lower band, showing the Bollinger Band "downward along the lower band" pattern, and the short-term trend is downward. Since the stage high of 1.1918, the K-line entities are generally long and the upper shadows are increasing, indicating that the upper selling pressure is dominant. In the MACD indicator, DIFF is -0.0007 and DEA is 0.0008. The histogram after the death cross is -0.0031, and the momentum is expanding negatively. The downward pressure has not yet subsided. RSI (14) is at 41.0286, which is in the weak range of "40-50" and has not yet entered below the traditional oversold line (30), leaving room for further weakness or technical rebound.
Regarding price, watch out for 1.1606 (intraday lower shadow confirmation zone), 1.1573 (previous low), and further down, 1.1391 (previous low cluster). Upward resistance lies at the middle Bollinger band at 1.1729, above which is the upper band at 1.1842 and the previous high at 1.1918. If the price stabilizes in the 1.1617-1.1606 range and then retraces to the middle band after the lower band expands, it could be considered a mean-reversion technical rebound. Conversely, a break below 1.1606, accompanied by a further expansion of the MACD-histogram, would signal an extension of the downward channel, with subsequent retests of 1.1573 and 1.1391 to follow. The recent widening of the Bollinger band suggests volatility divergence is not over yet, making the short-term strategy of "trend-following first, caution against contrarian trends" more appropriate.
Risk aversion dominated sentiment this week. Concerns over French politics and ratings have increased the risk premium on Eurozone assets. The US shutdown has weighed on global risk factor pricing, leading to rising equity market volatility. The repatriation of US dollar funds on the foreign exchange market has coincided with the euro's risk premium. During this period, "bad news has a more marginal impact," and any negative news is more likely to trigger a chain of liquidity contraction, price declines, and passive position reductions.
At the same time, the market's demand for policy certainty is increasing: on the one hand, it awaits a clearer timeframe for "longer higher or faster lower" in the Fed minutes; on the other, it focuses on whether ECB officials will release forward guidance consistent with the completion of the deflation process. Sentiment suggests a bearish market, but not extreme. The RSI is not deeply oversold, and a technical rebound or dead-cat bounce is still possible during this period. In short, pessimism is predominant, but there is still room for rebound.
Conclusion: The euro remains in a downward trend against the dollar, driven by fundamental factors like shrinking risk appetite and the dollar's safe-haven premium. Technically, the combination of a close to the lower band, a negative MACD, and a weak RSI suggests a bearish bias. In the short term, focus on the defense of 1.1617-1.1606 and the guidance provided by the minutes. In the medium term, observe whether political and policy factors can provide an opportunity for the euro to stabilize.
Fundamentals:
Uncertainty is growing in France. Pressure on the president to hold early elections is intensifying, with some former allies aligning with the opposition to demand a quick election or resignation. Rating agencies warn that if the political deadlock drags on, France's sovereign credit rating remains at risk of a downgrade. The turbulent political landscape has increased risk premiums, putting the euro under inherent pressure.
US politics are also turbulent. Senate Democratic and Republican leaders have yet to find a path to restoring funding, and the shutdown has entered its second week. Market confidence in a breakthrough this week has waned. As expectations of a functional government weaken, global risk appetite has cooled, leading to a surge in demand for the safe-haven dollar and traditional safe assets, and the euro has been squeezed against the dollar.
On the macroeconomic calendar, the most closely watched event of the day was the Federal Reserve meeting minutes. During the European session, several ECB officials, including President Christine Lagarde, spoke, and several Fed officials also attended events during the US session. Although Lagarde reiterated on Tuesday that "the eurozone's deflation process is complete" and expressed "confidence" that France will submit its budget on schedule, her words were unable to overcome the market's immediate discounting of political and fiscal issues.
Data also failed to support the euro. Factory orders in Germany, the eurozone's leading economy, fell 0.8% month-over-month in August, contrary to market expectations of a 1.4% increase and following a -2.7% contraction in July. Year-over-year growth rebounded to +1.5% from -3.3% in July, but this marginal improvement is insufficient to reverse short-term economic weakness. The volume-driven nature of orders suggests that future industrial output and external demand will remain weak, limiting fundamental support for the euro.
Policy divergence exacerbates uncertainty. The hawk-dove debate within the Federal Reserve continues: Minneapolis Fed President Neel Kashkari warns that "a too-rapid rate cut could trigger inflation," while Stephen Miran, President Trump's latest appointee to the Fed Board, emphasizes that "inflation is linked to population growth and monetary policy needs to be loosened." With no consensus on the inflation path, if the minutes indicate a protracted period of restrictive levels, the dollar's interest rate differentials and term premiums will continue to support it.
In summary: French political/fiscal uncertainty + tail risk of the US shutdown → lower risk appetite → the US dollar is supported by both safe-haven and interest rate differentials → the euro is under further pressure against the US dollar; and in the short term, there is a lack of major data that can quickly reverse this framework, and the bearish trend has the conditions to continue.
Technical aspects:
On the daily chart, the lower Bollinger Band is 1.1617, the middle Bollinger Band is 1.1729, and the upper Bollinger Band is 1.1842. After three consecutive declines, the exchange rate is running close to the lower band, showing the Bollinger Band "downward along the lower band" pattern, and the short-term trend is downward. Since the stage high of 1.1918, the K-line entities are generally long and the upper shadows are increasing, indicating that the upper selling pressure is dominant. In the MACD indicator, DIFF is -0.0007 and DEA is 0.0008. The histogram after the death cross is -0.0031, and the momentum is expanding negatively. The downward pressure has not yet subsided. RSI (14) is at 41.0286, which is in the weak range of "40-50" and has not yet entered below the traditional oversold line (30), leaving room for further weakness or technical rebound.
Regarding price, watch out for 1.1606 (intraday lower shadow confirmation zone), 1.1573 (previous low), and further down, 1.1391 (previous low cluster). Upward resistance lies at the middle Bollinger band at 1.1729, above which is the upper band at 1.1842 and the previous high at 1.1918. If the price stabilizes in the 1.1617-1.1606 range and then retraces to the middle band after the lower band expands, it could be considered a mean-reversion technical rebound. Conversely, a break below 1.1606, accompanied by a further expansion of the MACD-histogram, would signal an extension of the downward channel, with subsequent retests of 1.1573 and 1.1391 to follow. The recent widening of the Bollinger band suggests volatility divergence is not over yet, making the short-term strategy of "trend-following first, caution against contrarian trends" more appropriate.
Market sentiment observation:
Risk aversion dominated sentiment this week. Concerns over French politics and ratings have increased the risk premium on Eurozone assets. The US shutdown has weighed on global risk factor pricing, leading to rising equity market volatility. The repatriation of US dollar funds on the foreign exchange market has coincided with the euro's risk premium. During this period, "bad news has a more marginal impact," and any negative news is more likely to trigger a chain of liquidity contraction, price declines, and passive position reductions.
At the same time, the market's demand for policy certainty is increasing: on the one hand, it awaits a clearer timeframe for "longer higher or faster lower" in the Fed minutes; on the other, it focuses on whether ECB officials will release forward guidance consistent with the completion of the deflation process. Sentiment suggests a bearish market, but not extreme. The RSI is not deeply oversold, and a technical rebound or dead-cat bounce is still possible during this period. In short, pessimism is predominant, but there is still room for rebound.
Conclusion: The euro remains in a downward trend against the dollar, driven by fundamental factors like shrinking risk appetite and the dollar's safe-haven premium. Technically, the combination of a close to the lower band, a negative MACD, and a weak RSI suggests a bearish bias. In the short term, focus on the defense of 1.1617-1.1606 and the guidance provided by the minutes. In the medium term, observe whether political and policy factors can provide an opportunity for the euro to stabilize.
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