EUR

The single currency weakened for a second day on Tuesday, slipping towards the mid-1.16s as investors digested the resignation of France’s prime minister and a widening Franco-German bond spread. Political uncertainty in Paris added to existing headwinds, while the lack of euro-area data left the pair vulnerable to dollar strength. This underperformance contrasts with our earlier expectation that EURUSD would consolidate around the mid-1.17 area while the U.S. government shutdown persisted. Instead, the safe-haven bid for the dollar is outweighing shutdown-driven headwinds, at least for the time being. Today brings German industrial production figures and the ECB’s account of its September meeting, while tonight’s FOMC minutes will set the tone for risk sentiment. That aside, we continue to monitor developments in French politics, where further widening of the OAT-Bund spread could exacerbate euro weakness. Our view remains that EURUSD can recover if U.S. fiscal uncertainty persists and the Fed minutes hint at a dovish bias, but political risk at home cautions against chasing rallies until the pair reclaims the 1.17 handle.

Upside opportunities

• A dovish Fed tone amid weak US data and shutdown-related data gaps pushes EURUSD back toward 1.1820.
• ECB maintains a hawkish tone, cementing the end of the easing cycle.
• ECB inflation expectations show renewed anchoring near target.

Downside risk

• Even more political noise from France (OATs underperform) or weaker-than-expected eurozone retail data.
• A sharp reversal in leading economic indicators (PMI).
• US government shutdown resolves quickly, boosting the dollar.