Euro Slides as Oil Rises and Political Risks Persist

The euro weakened to $1.145, its lowest level since late July, as investors assessed developments in the Middle East while the USD remained supported by expectations of further Federal Reserve rate hikes. Brent crude resumed its decline after reports that Iran had offered to reopen the Strait of Hormuz within seven days if Washington lifts its military blockade of Iranian ports. Meanwhile, ECB’s Chief Economist Philip Lane warned that a new wave of higher energy prices could keep Eurozone inflation elevated for longer than policymakers initially anticipated. He said the shock should result in higher and more persistent inflation before a decline toward the ECB’s target from mid-2027. Following this month’s second rate hike since the Iran war sent energy costs soaring, ECB officials have begun laying the groundwork for further tightening. Eurozone inflation is expected to reach around 4% in coming months, with the ECB projecting 3% this year and 2.5% next year, well above its 2% target.

The euro weakened to $1.145, touching its lowest level since late July, as higher oil prices weighed on sentiment while the US dollar remained supported by expectations of further Federal Reserve rate hikes. Brent crude rose after touching its lowest level since September 10, with ongoing Middle East tensions keeping markets focused on energy flows and potential diplomatic efforts at this week’s UN meetings. Investors are also monitoring political uncertainty in Germany and mounting concerns over France’s public finances. Germany’s governing CDU suffered its worst-ever state election result in Mecklenburg-Western Pomerania, failing to win a single seat and prompting some party members to call for Chancellor Friedrich Merz to step down after 16 months in office. Meanwhile, France’s fiscal position remains under scrutiny as the government struggles to reduce its budget deficit, which stands at more than 5% of GDP, ahead of a divisive election next year.

The euro remained under pressure around $1.148, close to its weakest level since late July, as political uncertainty in Germany and concerns over France’s public finances weighed on sentiment. Germany’s governing CDU suffered its worst-ever state election result in Mecklenburg-Western Pomerania, failing to win a single seat and prompting some party members to call for Chancellor Friedrich Merz to step down after just 16 months in office. In Berlin, Merz’s CDU, which has governed the German capital since 2023, also trailed the Left party, which won 25.7% of the vote. The German political establishment had already been shaken by the CDU’s defeat to the anti-immigration AfD in Saxony-Anhalt two weeks ago. Meanwhile, France’s public finances are coming under increasing scrutiny, with Scope Ratings downgrading the country and Morningstar DBRS shifting its outlook to negative, adding to a growing series of warnings over France’s fiscal position ahead of next year’s presidential election.