EUR/USD: Euro bulls ignite as US government shuts down

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Key takeaways

• The US government shutdown, the first in nearly seven years, heightens political uncertainty ahead of the 2026 midterm elections.
• Past shutdowns show the US dollar tends to weaken during and after such impasses, with the 2018 episode triggering a 2% decline.
• Rising unemployment and Trump’s threat of mass layoffs increase bets for Fed rate cuts in October and December 2025.
• The Eurozone/US policy rate spread is steepening, reinforcing upside momentum in EUR/USD.

The US government has officially entered a shutdown in nearly seven years today, 1 October 2025, after Senate Republican and Democratic leaders remained locked in a stalemate over health care subsidies and engaged in brinkmanship maneuvers to frame the 2026 midterm elections.

The previous shutdown occurred in late December 2018 during President Trump’s first term, which lasted for 34 days, the longest US government shutdown in history since 1976.

Based on the data compiled by Bloomberg for the last three shutdowns, in 2013, early 2018, and late 2018, the US dollar drifted lower (Bloomberg Dollar Spot Index) both during the impasse and in the aftermath of the shutdowns.

The late 2018 episode produced the most pronounced bout of US dollar weakness; the greenback shed around -2% during the shutdown period of 34 days.

Right now, let's examine one key macro factor that is likely to support the ongoing medium-term uptrend phase of the EUR/USD in light of the latest US government shutdown.

Risk of a spike in the US employment rate leads to a more dovish Fed

Fig. 1: The Eurozone/US implied policy interest rate curve spread with EUR/USD as of 30 Sep 2025 (Source: MacroMicro)

To heighten brinkmanship ahead of the 2026 US midterm elections, President Trump suggested his administration could leverage the shutdown to pursue mass layoffs of government employees, going beyond the temporary furloughs already affecting an estimated 750,000 personnel.

The current unemployment rate in the US has increased to 4.3% in August 2025 from 4.2% in July, its highest level since October 2021. Hence, the unemployment rate could spike higher if the shutdown lasts for more than a week, with the mass layoffs proposed by Trump.

The Fed funds futures market has started to price in a bleak US labour market condition that triggers an increase in bets for two more Fed rate cuts in the October and December FOMC meetings before 2025 ends

Based on the latest data from the CME FedWatch tool, the odds of a 25 basis points (bps) cut to reduce the Fed funds rate to 3.75%-4.00% on the 29 October FOMC meeting have increased to 95% from 90% a day ago.

Also, the odds have risen to a 75% chance of another 25 bps rate cut in the 12 December 2025 FOMC meeting to bring the Fed funds rate lower to 3.50%-3.75% from around 58% chance recorded previously ex-post 17 September 2025 FOMC meeting.

All in all, the increase in Fed rate cut bets has led to the Eurozone/US implied policy interest rate curve spread to inch higher to -1.84% in November 2025 from -1.93% in October 2025 and rose steadily in the next few months to be at -1.55% by March 2026. Also, the curve spread has shifted upwards from three months ago (see Fig. 1).

The steepening of the Eurozone/US implied policy interest rate curve spread is likely to assert upside pressure in the EUR/USD.

Let’s now examine the latest technical factors on the EUR/USD to determine the next potential short-term (1 to 3 days) trajectory and its key levels to watch.

Fig. 2: EUR/USD minor trend as of 1 Oct 2025 (Source: TradingView)

Fig. 3: EUR/USD medium-term & major trends as of 1 Oct 2025 (Source: TradingView)

Preferred trend bias (1-3 days)

Bullish bias with key short-term pivotal support at 1.1680 for the EUR/USD. A clearance above 1.1760 increases the odds of a new minor bullish impulsive up move sequence for the next intermediate resistances to come in at 1.1820, 1.1860, and 1.1910 in the first step (see Fig. 2).

Key elements

• The EUR/USD exited from the minor descending channel resistance on Monday, 29 September 2025, and traded back above its 50-day moving average. These observations suggest that the minor corrective decline sequence from its 17 September 2025 ex-post FOMC high to 25 September 2025 low of 1.1645 is likely to have ended (see Fig. 2).
• The hourly RSI momentum indicator of the EUR/USD has managed to hover above a horizontal support at the 46 level, which suggests a potential build-up of short-term bullish momentum (see Fig. 2).
• The yield spread between the 2-year German Bund and the US Treasury note has just staged a bullish breakout on Tuesday, 29 September 2025, at the time of writing. It narrowed to -1.57% as of Wednesday, 1 October 2025, at the time of writing, from -1.7% printed on 25 September 2025 (see Fig. 2).
• This development indicates a relative decline in the yield attractiveness of the 2-year US Treasury versus its German counterpart, which in turn exerts downside pressure on the US dollar against the euro (see Fig. 2).
• The EUR/USD has continued to oscillate above a medium-term ascending trendline in place since the 3 February 2025 low, coupled with a recent bullish momentum reading seen in its daily RSI momentum indicator. These observations support the ongoing medium-term uptrend phase of the EUR/USD (see Fig. 3).

Alternative trend bias (1 to 3 days)

Failure to hold at the 1.1680 short-term key support invalidates the bullish scenario on the EUR/USD to expose the next intermediate supports at 1.1630/1.1615 and 1.1570 (the medium-term pivotal support).

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