Euro Slides as Inflation Eases

The euro was little changed at $1.12, recovering from its weakest level in a year and a half, as investors assessed remarks from European Central Bank President Christine Lagarde and awaited US inflation data for fresh clues on the Federal Reserve’s rate path. Lagarde said elevated euro-area inflation driven by high energy prices has yet to feed into the broader economy. Speaking at a CNN event in Bangkok, she said policymakers are monitoring indirect effects and potential second-round inflationary pressures, stressing the need for caution despite no clear signs of such effects emerging so far. Meanwhile, inflation continues to exceed forecasts, while the US-Iran conflict shows little sign of easing, prompting markets to price in another ECB rate hike in December. Despite its recent recovery, the euro remains under pressure from surging energy prices, persistent inflation and rising borrowing costs, as well as fiscal concerns in highly indebted countries, particularly France.

The euro attempted to rebound from its weakest level in a year and a half, trading just below $1.12, as the oil price rally paused and the US dollar and Treasury yields retreated. However, the common currency remains under pressure from persistent energy-driven inflation, resilient economic activity and growing concerns over France’s public finances ahead of next year’s presidential election. France’s 2027 budget plan aims to reduce the fiscal deficit to 5% of GDP, but uncertainty is mounting over whether the government can secure parliamentary approval for substantial spending cuts amid a deeply divided legislature. On the monetary policy front, markets are pricing in another rate hike from both the European Central Bank and the US Federal Reserve in December. Investors are now turning their attention to Wednesday’s US CPI report and remarks from ECB policymakers during this week’s IMF–World Bank meetings for further clues on the outlook for interest rates.

The euro began the week trading below $1.12, hovering near its weakest level in 17 months, as investors weighed France’s record-high debt and political challenges to implementing budget cuts against the resilience of the US economy and the strength of the dollar. France’s budget plans for 2027 aim to reduce the fiscal deficit to 5% of GDP, but concerns are mounting over whether the government can secure parliamentary approval for substantial spending cuts amid a deeply divided parliament, particularly with next year’s presidential election approaching. Meanwhile, Brent crude prices rebounded following a deadly attack on Riyadh’s airport in Saudi Arabia, while Ukraine reported continued Russian strikes on its energy infrastructure. Markets are also looking ahead to Wednesday’s US CPI data for clues about the Federal Reserve’s interest-rate outlook, while eurozone central bankers are scheduled to deliver speeches during the IMF-World Bank annual meetings in Bangkok this week.