02.10.202500:00 Forex Analysis & Reviews: The Dollar Doesn't Fall for the Provocation

Not as bad as it sounds — yes, the U.S. government did shut down, but this isn't the first time. Over the last 50 years, such events have happened around 20 times. Republicans only need eight votes from Democrats to get the government back to work, and they already have three. It's unlikely the shutdown will last long. That's why buying EUR/USD based on this headline is risky.

While previous shutdowns have temporarily hurt the U.S. dollar, they are generally short-term in nature. Yes, delays in publishing important reports, including employment and inflation data, are expected. Yes, there will be furloughs and a slowdown in GDP — but history shows that things eventually stabilize.

How the Dollar Typically Reacts to Shutdowns

EUR/USD failed to break through the 1.18 level — not only because the shutdown was viewed as a short-term issue, but also because eurozone inflation didn't surprise to the upside. September's inflation rate came in flat at 2.2%, aligning with Bloomberg's forecasts, despite earlier figures from Spain, France, and Italy hinting it could be higher. The pair's retreat reflects the classic "buy the rumor, sell the fact" principle.

According to European Central Bank President Christine Lagarde, inflation risks are balanced in both directions. With borrowing rates at 2%, the ECB is feeling comfortable. The central bank is prepared to act only if there is a notable deviation from projected inflation or an unexpected shock. The ECB's task now is to maintain the current CPI level — with precision, humility, and a solid data-driven approach.

Eurozone Inflation Trends

Lagarde's tone suggests that the ECB is in no rush to cut rates further. The cycle of monetary accommodation is likely done. As a result, going forward, EUR/USD movements will depend more on the actions the Federal Reserve takes next.

There's a clear split within the Fed. Some officials are concerned about reaccelerating inflation. Others emphasize the need to slow down the cooling labor market. The most balanced view comes from Vice Chair Philip Jefferson, who noted that both inflation and unemployment will rise in the near future, but normalize by 2026.

This outlook implies that the Fed will likely cut the federal funds rate two more times in 2025, followed by a prolonged pause. This divergence in monetary policy is expected to keep the U.S. dollar under pressure through the rest of the year — even if the U.S. government shutdown doesn't worsen the bearish outlook for EUR/USD.

Technically, EUR/USD is locked in a fierce battle around the key pivot level at 1.175. This area also coincides with several key moving averages, making it a strong support/resistance zone.

• A bullish breakout here would justify adding to long positions.
• A bearish rejection, however, would increase the risk of consolidation between the $1.165–$1.175 range.