Euro Attempts Recovery

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.

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.