Euro Softens to $1.17 as Markets Eye Interest Rate Outlook

The euro traded slightly above $1.12, hovering near its weakest level since May 2025, as concerns over France’s fiscal position weighed on sentiment. France is set to submit its 2027 budget today, while Marine Le Pen is expected to outline plans to cut government spending by €25 billion a year. Political uncertainty is also rising elsewhere, with Spain calling a snap election for November 29 and Italy heading for general elections next year. Meanwhile, bond-market turmoil has prompted investors to scale back expectations for further ECB rate hikes. Markets now price an 80% chance of another hike by year-end, compared with expectations for at least three additional moves by March 2027 previously. ECB Chief Economist Philip Lane said higher borrowing costs could curb demand and reduce the need for further tightening. In the US, weaker-than-expected inflation and jobs data strengthened expectations for the Fed to hold rates in October, with a December hike seen as more likely.

The euro continued to depreciate around $1.12, its weakest level since May 2025, as mounting fiscal and political concerns in the region weighed on the currency. Spanish Prime Minister Pedro Sánchez called a snap election after Congress rejected measures aimed at addressing the country’s housing crisis. This comes on top of investors’ concerns about France’s fiscal outlook and political stability. On the monetary policy front, the ECB faces a difficult trade-off as elevated energy prices fuel inflation while weighing on growth. Eurozone inflation accelerated to 3.8% in September, its highest since September 2023 and well above the ECB’s 2% target, keeping pressure on the central bank to maintain a restrictive stance. Meanwhile, the dollar remained firm despite softer-than-expected US jobs data, adding to downward pressure on the euro as expectations for a Federal Reserve hike this month were reduced.

The euro edged up to $1.126 after briefly falling to its lowest level in more than a year, as weaker-than-expected US jobs data weighed on the dollar. The US economy added just 29,000 jobs in September, well below expectations of 90,000, boosting expectations that the Fed may keep rates unchanged at its upcoming meeting. Meanwhile, Eurozone inflation accelerated to 3.8%, its highest since September 2023 and well above the ECB’s 2% target, driven largely by higher fuel prices. Despite renewed inflationary pressures, concerns over France’s fiscal outlook continued to weigh on the euro after the government unveiled deficit-reduction plans that the fiscal watchdog described as based on “optimistic” assumptions. Markets also expect the ECB to adopt a gradual approach to monetary tightening. ECB official Isabel Schnabel said the coming months will be key to assessing the energy shock and determining the appropriate level of interest rates, signaling a cautious approach to further tightening.