The Euro weakened against the US Dollar on Tuesday, with the EUR/USD pair falling 0.46% to trade at 1.1654. The decline was primarily driven by increasing political instability in France, which has raised concerns about the country's fiscal health. Concurrently, the US Dollar saw a significant rebound, with the US Dollar Index (DXY) gaining 0.52% as investors reacted to new inflation data and ongoing domestic economic uncertainties.
Key Takeaways
- The EUR/USD exchange rate dropped to 1.1654, a decline of 0.46%, as the Euro faced significant selling pressure.
- Political uncertainty in France, following the resignation of Prime Minister Lecom, is fueling concerns over the 2026 fiscal budget.
- The US Dollar strengthened, with the DXY rising 0.52%, supported by higher consumer inflation expectations from a New York Fed survey.
- Federal Reserve officials offered differing views, with Neel Kashkari highlighting stagflation risks while Stephen Miran pointed to weaker growth.
- German economic data showed a contraction in factory orders for August, further weighing on the Eurozone's economic outlook.
French Budget Crisis Pressures the Euro
The primary catalyst for the Euro's decline is the escalating political situation in France. The resignation of Prime Minister Lecom has cast doubt on the government's ability to pass its 2026 fiscal budget, a critical step for stabilizing the nation's public finances.
This political deadlock prevents the Euro from challenging key resistance levels and approaching its yearly high of 1.1918. Investors are concerned that a failure to approve a budget could lead to prolonged fiscal instability in the Eurozone's second-largest economy.
Understanding the French Budget Process
If the French assembly fails to approve a budget, it can enact a special law to roll over spending from the previous year (2025). While this temporary measure would prevent a government shutdown similar to those seen in the United States, it is not a permanent solution. The assembly must eventually pass a formal budget, and the current political infighting makes that outcome uncertain.
European Central Bank President Christine Lagarde commented on the situation, expressing her hope that France would produce a budget in a timely manner. She also reiterated her view that the Euro should have a more significant global role, arguing the Euro Area is often an "innocent bystander" to economic shocks originating from the United States.
US Dollar Gains Strength Amid Economic Data
While the Euro struggled, the US Dollar mounted a surprising recovery. The renewed strength was partly fueled by a report from the New York Federal Reserve, the Survey of Consumer Expectations (SCE), which indicated rising inflation fears among consumers.
According to the survey, median one-year inflation expectations increased to 3.4% from 3.2%. The five-year outlook also ticked up, rising to 3.0% from 2.9%. These figures suggest that consumers anticipate higher prices, a factor the Federal Reserve monitors closely when setting monetary policy.
Consumer Sentiment Declines
Adding to the complex economic picture, the RealClearMarkets/TIPP Economic Optimism Index for October fell slightly to 48.3 from 48.7 in September. This is the second consecutive month the index has been below the neutral 50-point mark, indicating a pessimistic outlook among consumers.
Despite the strengthening dollar, market expectations for a near-term interest rate cut remain high. Data from the Prime Market Terminal interest rate probability tool shows that money markets are pricing in a 94% probability of a 25-basis-point rate cut by the Federal Reserve at its upcoming meeting on October 29.
Federal Reserve Officials Offer Mixed Signals
Recent commentary from Federal Reserve officials has provided a divided outlook on the U.S. economy. Minneapolis Fed President Neel Kashkari adopted a moderately hawkish tone, stating it was too early to know if tariffs would lead to persistently high inflation.
"Recent data show signs of stagflation," Kashkari noted, though he expressed continued optimism about the strength of the labor market. He also warned that a few rate cuts might not significantly lower mortgage rates and could risk a new burst of inflation.
In contrast, Fed Governor Stephen Miran highlighted that economic growth in the first half of the year was weaker than initially thought. He emphasized that monetary policy must remain forward-looking, considering the delayed impact of previous interest rate hikes.
Weak German Data Adds to Eurozone Woes
The Euro's weakness was compounded by disappointing economic data from Germany, the Eurozone's largest economy. The Deutsche Bundesbank reported that German Factory Orders contracted by -0.8% month-over-month in August.
Although this figure was an improvement over July's -2.7% contraction, it fell short of economists' expectations for a 0.2% expansion. The data points to ongoing weakness in the German manufacturing sector, a key engine of growth for the entire currency bloc.
On a more positive note, year-over-year factory orders showed growth, rising to 1.5% from -3.3% in the same period last year. However, the monthly contraction captured more immediate market attention.
EUR/USD Technical Outlook
The EUR/USD pair's close below the significant 1.1700 level on Tuesday signals potential for further declines. The Relative Strength Index (RSI), a key momentum indicator, has turned bearish, suggesting that sellers currently have control of the market.
The first level of technical support for the pair is the 100-day Simple Moving Average (SMA), located at 1.1628. A break below this level could open the door for a test of the 1.1600 psychological mark.
Further downside targets include:
- The August 27 swing low at 1.1574.
- The August 1 cycle low at 1.1391.
Conversely, if the pair manages to rebound, the first line of resistance is the 1.1700 level it just broke. A sustained move above this could see buyers targeting higher resistance areas at 1.1760, 1.1800, and the July 1 high of 1.1830.
