EUR/USD Price Forecast - EURO to Dollar Drop to 1.1560, France’s Political Turmoil and Italy’s 2.4% Output

The EUR/USD pair extended its decline on Friday, trading around 1.1560, after briefly rebounding toward 1.1590, as market sentiment favored the U.S. dollar amid heightened political uncertainty in Europe and a broad flight to safety. The euro has lost more than 1.4% this week, marking its worst weekly performance of 2025, as France’s internal political tensions and disappointing Italian industrial data overshadowed a modest improvement in Germany’s trade surplus. Meanwhile, the U.S. Dollar Index (DXY) climbed near 99.26, securing a weekly gain of 1.7%, its strongest advance in nearly a year, with traders rotating back into the greenback ahead of key U.S. consumer confidence data and continued uncertainty surrounding the U.S. government shutdown.

French Political Turmoil Accelerates Euro Weakness

Pressure on the euro intensified following the resignation of French Prime Minister Sébastien Lecornu, which reignited political volatility in one of the Eurozone’s largest economies. Markets now await President Emmanuel Macron’s appointment of his sixth prime minister, a process that has exposed deep fractures within the National Assembly and amplified concerns over France’s fiscal trajectory. Macron’s challenge lies in pushing through a tightening budget amid rising public opposition, which has triggered fears of delayed reforms and further fiscal slippage. The prospect of another early parliamentary election or coalition reshuffle has fueled risk aversion across European assets, driving investors toward the U.S. dollar and away from euro-denominated instruments. The uncertainty has also undermined bond market stability, with French 10-year yields rising above 2.95%, while German yields fell to 2.61%, widening the Franco-German spread to its largest in six months — a direct signal of mounting regional divergence.

Eurozone Macro Divergence Deepens: German Resilience Meets Italian Fragility

While Germany’s trade surplus expanded to €17.2 billion in August, surpassing expectations of €15.1 billion, confirming robust export performance, Italy’s industrial production collapsed by 2.4%, its steepest monthly contraction this year. The disparity between the bloc’s northern and southern economies has once again highlighted structural imbalances within the Eurozone. Germany’s exports benefited from stable demand in machinery and automotive components, but Italy’s energy costs and fragile manufacturing output reflected the broader slowdown across southern Europe. These figures underscored the European Central Bank’s (ECB) dilemma — inflation remains uneven, with headline CPI at 2.6%, but growth momentum is deteriorating, prompting a split among policymakers on whether further easing or a prolonged pause is the appropriate path. The ECB’s September minutes revealed “divergent inflation expectations” among members, and no immediate urgency to adjust policy, yet traders now price in a 25 bp cut by December, especially if the euro remains under pressure.

U.S. Dollar Extends Gains Amid Safe-Haven Rotation

The dollar’s resurgence this week stems from a combination of domestic and international drivers. Political disarray in France and Japan’s cabinet transition under Sanae Takaichi boosted demand for the U.S. currency as a global reserve hedge. With the U.S. government shutdown stalling most major data releases, traders shifted their focus to high-frequency indicators, including consumer sentiment and inflation expectations. The University of Michigan Consumer Sentiment Index is projected to fall to 54.2 in October from 55.1 in September, marking a third straight month of decline, as households face rising costs and uncertain fiscal prospects. Yet, paradoxically, these soft data have failed to weaken the dollar, as safe-haven positioning and limited liquidity favored defensive flows into Treasuries and the greenback. The 10-year Treasury yield dipped to 4.09%, while the 2-year held near 4.31%, preserving a mild inversion that reflects recession risk but also reinforces dollar demand in global carry trades.

Technical Setup: EUR/USD Faces Heavy Resistance Below 1.1600

Technically, EUR/USD remains trapped within a well-defined bearish channel that began in mid-September. The pair broke below key support at 1.1600 and extended losses toward 1.1540, its lowest level since August 5. Short-term momentum indicators confirm downside bias, with the Relative Strength Index (RSI) hovering around 35, signaling near-oversold conditions but no clear reversal yet. The 50-day and 200-day exponential moving averages (EMAs) stand at 1.1666 and 1.1698, respectively, both reinforcing overhead resistance. Immediate resistance lies at 1.1575, followed by 1.1650, where prior support turned into a sell zone. On the downside, sustained trading below 1.1540 could open the door toward 1.1470, and a further break may expose the August 1 low near 1.1395. Traders remain cautious of any rebound attempts, viewing rallies as opportunities to reestablish shorts amid persistent euro weakness.