Euro Slides as Dollar Holds Firm Ahead of Fed Decision

The euro continued to depreciate around $1.117 on Monday, 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.

The euro remained below $1.13, close to its lowest level since May 2025, despite stronger-than-expected Eurozone inflation data. Annual inflation accelerated to 3.8% last month, its highest level since September 2023 and well above the ECB’s 2% target, driven largely by higher fuel prices. Despite the renewed inflationary pressure, the euro remains under pressure as markets expect the ECB to tighten monetary policy more gradually than the Federal Reserve. Further ECB rate hikes are priced in over the coming year, with the next move potentially coming as early as December. ECB Executive Board member Isabel Schnabel said Wednesday that the coming months would be important for assessing the impact of the energy shock and determining how high interest rates need to rise. Her comments suggest a cautious, wait-and-see approach as the US-Iran conflict enters its eighth month. The eurozone’s weak outlook could also limit aggressive ECB tightening, with GDP seen growing just 0.9% this year.