Euro Recovers Above $1.12, but Weekly Losses Persist

The euro rebounded above $1.12 after hitting a 17-month low of $1.1161 earlier this week, supported by stabilizing French bond markets and easing energy prices and US Treasury yields, which weakened the dollar’s rally. However, the common currency remained on track for a fifth consecutive weekly decline, with cumulative losses of around 3% against the dollar, as investors weighed France’s record-high debt and the political challenges of implementing budget cuts against a resilient US economy and stronger dollar. Meanwhile, Brent crude retreated from its recent rally after US President Donald Trump said Washington would not launch an attack on Iran before the November midterm congressional elections, citing productive talks aimed at ending the conflict. The easing in oil prices prompted traders to scale back expectations for central bank rate hikes, with the ECB deposit rate now priced to rise from 2.50% currently to 2.72% by December and 3.20% by late 2027.

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.