Euro Analysis: EUR/USD pares losses as dollar rally pauses
2025-10-10 18:38:39
The euro rebounded slightly against the dollar during European trading on Friday (October 10). The pair traded above 1.1572 after hitting a two-month low near 1.1540 the previous day. Affected by uncertainty surrounding France's political and fiscal situation, the euro has fallen over 1.4% so far this week, putting it on track for its worst week of the year.
ING analysts predict aggressive buying near 1.150 should the euro fall further against the dollar. This price level suggests over 2% upside potential in the short term—assuming, of course, that the dollar-euro swap spread doesn't widen further. Analysts still favor a recovery to 1.170, though this move is unlikely to be smooth or unidirectional.
On the other hand, analysts say the dollar is drawing support from concerns about the situation in France and similar issues in Japan. Sanae Takaichi, a pro-stimulus candidate within Japan's Liberal Democratic Party, is currently considered a leading candidate for the next prime minister. Furthermore, recent dovish comments from Federal Reserve policymakers, as the US government shutdown has delayed the release of most economic indicators, have failed to dent the dollar's strength.
Markets are pricing in a 95% chance of a 0.25 percentage point rate cut in October, but the probability of further monetary easing in December has fallen to 80%, down from 90% a week ago.
On the economic calendar on Friday, the University of Michigan's consumer sentiment index is expected to show a further decline in consumer confidence in October.
French Prime Minister Sebastien Le Cornu unexpectedly resigned earlier this week, leaving markets awaiting the appointment of a replacement by President Emmanuel Macron. The new chancellor will face the daunting task of pushing through an austerity budget amid strong opposition within parliament – a trend that has forced the resignation of five prime ministers in the past two years.
The weak and brief euro rally seen in the market on Wednesday's French political news is understandable. Although the 10-year yield spread between German and French government bonds has fallen back to around 80 basis points, the more forward-looking foreign exchange market still believes that investors have little reason to be optimistic about the euro's performance.
With the new Prime Minister's selection set to be announced today, it is widely believed that the new Prime Minister's political support base remains very weak. Although outgoing Prime Minister Lecornu has pledged to meet the government's budget obligations to reassure the market, these promises are clearly not enough to allay concerns about the stability of the French government.
That being said, we still struggle to see any material impact on the Euro beyond the short term, but the Euro may nonetheless gain some traction from today’s announcement from the new Prime Minister.
If US jobs data—whenever it's released—shows a trend more toward weakness than strength, and if next week's CPI data supports the view that the Fed will cut interest rates in October, then French political risk could become a negative factor for the broader European bond market, putting sustained downward pressure on EUR/USD. Currently, the conditions for this scenario are not in place. While France's budget situation is complex, market vigilance typically leads to greater fiscal caution, as evidenced by the UK under Truss and Italy before him.
Technical Analysis
(Source of EUR/USD 4-hour chart: Yihuitong)
In recent months, the exchange rate fluctuations of EUR/USD have formed an upward channel. The exchange rate has fallen below the support line S. After falling below 1.16600, the downward trend of EUR/USD continues.
In mid-September, the exchange rate entered a supply zone, located above the previous high near 1.1790 and the psychological level of 1.1800. As indicated by the "Liquidity Sweep" pattern, smart money appeared to be building short positions.
Since then, the market has been seeking liquidity in the opposite direction. On the EUR/USD chart, we have identified a potential demand zone around key levels, including: the lower boundary of the blue ascending channel; 1.1530, where long stop-loss orders may be placed; and 1.14500 support.
From a bearish perspective, the market is currently trading in a descending channel; the channel’s median line and the previous local support level of 1.1600 may both pose resistance.
Based on the above analysis, in the short term, the market will maintain a bearish trend; in the medium term, the bearish pressure may ease and the euro may enter a consolidation phase against the US dollar.
Whether this trend can be realized and in what specific form it will take will largely depend on the news developments and political situation in the United States and France.
ING analysts predict aggressive buying near 1.150 should the euro fall further against the dollar. This price level suggests over 2% upside potential in the short term—assuming, of course, that the dollar-euro swap spread doesn't widen further. Analysts still favor a recovery to 1.170, though this move is unlikely to be smooth or unidirectional.
On the other hand, analysts say the dollar is drawing support from concerns about the situation in France and similar issues in Japan. Sanae Takaichi, a pro-stimulus candidate within Japan's Liberal Democratic Party, is currently considered a leading candidate for the next prime minister. Furthermore, recent dovish comments from Federal Reserve policymakers, as the US government shutdown has delayed the release of most economic indicators, have failed to dent the dollar's strength.
Markets are pricing in a 95% chance of a 0.25 percentage point rate cut in October, but the probability of further monetary easing in December has fallen to 80%, down from 90% a week ago.
On the economic calendar on Friday, the University of Michigan's consumer sentiment index is expected to show a further decline in consumer confidence in October.
French Prime Minister Sebastien Le Cornu unexpectedly resigned earlier this week, leaving markets awaiting the appointment of a replacement by President Emmanuel Macron. The new chancellor will face the daunting task of pushing through an austerity budget amid strong opposition within parliament – a trend that has forced the resignation of five prime ministers in the past two years.
The weak and brief euro rally seen in the market on Wednesday's French political news is understandable. Although the 10-year yield spread between German and French government bonds has fallen back to around 80 basis points, the more forward-looking foreign exchange market still believes that investors have little reason to be optimistic about the euro's performance.
With the new Prime Minister's selection set to be announced today, it is widely believed that the new Prime Minister's political support base remains very weak. Although outgoing Prime Minister Lecornu has pledged to meet the government's budget obligations to reassure the market, these promises are clearly not enough to allay concerns about the stability of the French government.
That being said, we still struggle to see any material impact on the Euro beyond the short term, but the Euro may nonetheless gain some traction from today’s announcement from the new Prime Minister.
If US jobs data—whenever it's released—shows a trend more toward weakness than strength, and if next week's CPI data supports the view that the Fed will cut interest rates in October, then French political risk could become a negative factor for the broader European bond market, putting sustained downward pressure on EUR/USD. Currently, the conditions for this scenario are not in place. While France's budget situation is complex, market vigilance typically leads to greater fiscal caution, as evidenced by the UK under Truss and Italy before him.
Technical Analysis
(Source of EUR/USD 4-hour chart: Yihuitong)
In recent months, the exchange rate fluctuations of EUR/USD have formed an upward channel. The exchange rate has fallen below the support line S. After falling below 1.16600, the downward trend of EUR/USD continues.
In mid-September, the exchange rate entered a supply zone, located above the previous high near 1.1790 and the psychological level of 1.1800. As indicated by the "Liquidity Sweep" pattern, smart money appeared to be building short positions.
Since then, the market has been seeking liquidity in the opposite direction. On the EUR/USD chart, we have identified a potential demand zone around key levels, including: the lower boundary of the blue ascending channel; 1.1530, where long stop-loss orders may be placed; and 1.14500 support.
From a bearish perspective, the market is currently trading in a descending channel; the channel’s median line and the previous local support level of 1.1600 may both pose resistance.
Based on the above analysis, in the short term, the market will maintain a bearish trend; in the medium term, the bearish pressure may ease and the euro may enter a consolidation phase against the US dollar.
Whether this trend can be realized and in what specific form it will take will largely depend on the news developments and political situation in the United States and France.
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