Euro Is Flagged by Political Issues

The U.S. Dollar Index (DXY) is gaining 0.45% to 106.22 points, while the EURUSD is down 0.51% to 1.05270. This follows last week’s 1.6% decline in the Dollar, which saw the EURUSD close at 1.05810. Despite recent volatility, the pair has managed to hold above the critical resistance at 1.05300-1.05500, keeping the bullish scenario toward 1.09500-1.10500 intact. A price gap at 1.05800 remains unclosed from Monday, and its resolution—particularly after Friday’s Nonfarm Payrolls—could signal a decisive move for the pair.

Geopolitical factors are adding pressure on the Euro, as U.S. President-elect Donald Trump has threatened 100% tariffs on BRICS countries if they pursue a single currency. This has raised concerns about a potential global trade war. However, markets appear to view the threat as more of a negotiation tactic, with the EURUSD dipping 0.82% to 1.04980 on the news—a less severe reaction compared to the 1.8% drop after the U.S. elections. Political issues in Europe are also influencing sentiment, with France’s Prime Minister Michel Barnier using special powers to pass a budget without parliamentary approval, triggering threats of a no-confidence motion. Given France’s significance as the EU’s second-largest economy, any instability could have broader implications, though Barnier’s experience as a seasoned negotiator suggests a likely resolution.

Recent macroeconomic data has shown a divergence between the Eurozone and U.S. economies, with manufacturing PMIs indicating a contraction in the Eurozone and the U.K., while the U.S. showed signs of improvement. Service PMIs, due on Wednesday, and ADP Nonfarm Payrolls data are expected to confirm this trend. The week is further highlighted by speeches from ECB President Christine Lagarde, BoE Governor Andrew Bailey, and Fed Chair Jerome Powell, all of which could heighten market volatility. Meanwhile, investor positioning remains unclear, with no recent updates from the WisdomTree Bloomberg US Dollar Bullish Fund (USDU), although earlier data indicated a modest $3.5 million short bet against the Dollar at 1.09000-1.09380.

From a technical perspective, the EURUSD’s ability to hold above 1.05300-1.05500 is crucial for maintaining its bullish outlook. Closing the price gap at 1.05800 under favorable conditions would bolster confidence in an upward move, with targets at 1.09500-1.10500 becoming increasingly likely. While uncertainties persist, the pair’s resilience and weakening Dollar momentum suggest the potential for further recovery.