**EUR/USD Price Forecast: US Government Shutdown Pressures the US Dollar**
*By Matías Salord — Original analysis published on FXStreet*
The EUR/USD currency pair rebounded on Friday, extending its recovery from weekly lows as concerns regarding a potential United States government shutdown continued to undermine the US Dollar. With fiscal uncertainty increasing, economic indicators falling short of expectations, and rising skepticism surrounding the Federal Reserve’s tightening cycle, bullish momentum for the Euro has strengthened.
This article explores the key drivers moving EUR/USD, offering a detailed breakdown of recent price action, macroeconomic events, and technical view.
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### Fundamental Overview
Several macroeconomic and political variables are shaping the direction of the EUR/USD exchange rate. The most prominent is the looming US government shutdown, which has started to weigh heavily on investor sentiment.
**1. US Government Shutdown Concerns Undermine the Dollar**
– The US government faces potential closure due to funding disagreements in Congress.
– As of the end of the fiscal year (September 30), legislators had yet to reach an agreement on a new budget, increasing the risk of a shutdown.
– Such political gridlock creates uncertainty regarding fiscal policy and reduces confidence in US assets.
– Market participants often sell the US Dollar during political impasses, as safe-haven flows favor alternative currencies, notably the Euro and the Japanese Yen.
**2. Weakness in US Economic Data Accelerates Sell-off**
– Recently released US economic reports have failed to meet expectations:
– **Personal Consumption Expenditures Price Index (PCE)**, which is the Federal Reserve’s preferred gauge of inflation, showed limited pressure.
– **Initial Jobless Claims** modestly increased, indicating some softness in the labor market.
– **Durable Goods Orders** slightly improved in August, but revised June-July figures and lower business investment dimmed the outlook.
– Collectively, these data points suggest that the Fed’s efforts to curb inflation may already be cooling the economy, lowering the probability of further rate hikes.
**3. Fed Officials Send Mixed Signals**
– While the Fed continues to keep the possibility of an additional rate hike in play, officials are increasingly cautious.
– Some FOMC members have made dovish statements, acknowledging that monetary tightening is beginning to impact economic activity.
– Market expectations for another rate increase before the end of 2023 have moderated:
– CME Group’s FedWatch Tool shows a declining probability of another hike in November or December.
– Lower rate expectations translate into a softer US Dollar.
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### European Factors Supporting the Euro
Although US-based developments are currently the dominant force in EUR/USD movement, the Euro is also supported by evolving monetary and economic conditions in the Eurozone. Despite subdued growth, the European Central Bank (ECB) remains committed to fighting inflation.
**1. ECB Cautiously Hawkish**
– The ECB raised interest rates at its most recent meeting, pushing the deposit rate to a record high.
– While ECB President Christine Lagarde signaled that future rate hikes would likely be more limited or even paused, the monetary stance remains restrictive, offering underlying support to the Euro.
– Eurozone inflation, while easing, remains above the ECB’s target.
– Market participants anticipate the ECB will maintain rates at restrictive levels well into 2024.
**2. Moderating European Inflation Offers Stability**
– Headline Consumer Price Index (CPI) across the Euro area shows signs of stabilization:
– Germany’s latest CPI print came in below expectations, reflecting slowing price growth.
– Other core countries, including France and Italy, report disinflationary traits, reducing the odds of abrupt ECB adjustments.
– The combination of elevated rates and gradual inflation moderation provides a stable background for the Euro while maintaining the ECB’s credibility.
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### Market Sentiment and Risk Dynamics
As macroeconomic indicators and central bank policy shift, overall market sentiment now favors short-term Euro strength, especially as traders grow cautious ahead of key Q4 events.
**Risk-Off
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