Euro Falls Toward 17-Month Low

The euro weakened below $1.12, moving closer to a 17-month low of $1.116 touched earlier this week, as elevated energy prices, rising inflation and interest rate expectations, and fiscal concerns, particularly in France, continued to weigh on sentiment. Markets now price roughly 75 basis points of ECB and 85 basis points of Fed tightening by the end of next year, as oil prices rebounded after Iran intensified attacks on shipping in the Strait of Hormuz. Meanwhile, French bonds remain under pressure as political uncertainty ahead of the 2027 election raises doubts over the country’s ability to repair its finances. The minority government has unveiled a plan to cut the budget deficit, although the fiscal watchdog warned that its economic assumptions were “optimistic.” Political uncertainty is also rising elsewhere, with Spain calling a snap election for November 29 and Italy heading to the polls next year.

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.