EUR/USD strengthens above 1.1650, budget uncertainty might cap gains

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The EUR/USD pair gains traction near 1.1670 during the early European session on Monday. The Euro (EUR) strengthens against the US Dollar (USD) amid improved risk sentiment. However, elevated budget uncertainty in France might cap the upside for the major pair.

EUR/USD edges higher to around 1.1670 in Monday’s early European session.
S&P downgraded France to A+ as budget uncertainty remains elevated.
Fed’s dovish stance and ongoing US federal shutdown might weigh on the USD.

Bloomberg reported on Saturday that S&P Global Ratings downgraded France to A+ from AA-. The downgrade means France has lost its AA- rating at two of the three major credit assessors in little more than a month, including downgrades from Fitch and DBRS.

The downgrade followed a week of political turmoil where French Prime Minister Sebastien Lecornu barely survived two no-confidence votes in parliament. To gain enough support to stay in power, his new government had to sacrifice President Emmanuel Macron's deeply unpopular 2023 pension reform. The political crisis in France might undermine the shared currency against the USD in the near term.

Across the pond, the US Federal Reserve (Fed) is expected to cut interest rates by a quarter of a percentage point at the upcoming meeting on October 28-29, 2025. Markets have priced in nearly a 100% probability of a Fed rate cut in the October meeting, according to the CME FedWatch tool. This would bring the federal funds rate target range to 3.75%-4.00%.

The ongoing US federal government shutdown could undermine the US Dollar against its rivals. The government shutdown has entered its 20th day with no end in sight, after senators failed for the 10th time to resolve the impasse in votes on Thursday. The shutdown is now the third-longest funding lapse in modern history.

(The story was corrected on October 20 at 06:25 GMT to say, in the third bullet point, that Fed’s dovish stance and ongoing US federal shutdown might weigh on the USD, not to cap the pair’s upside.)

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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