European political uncertainty is weighing on the euro as concerns over France, Spain and Germany add to pressure on the single currency. EUR/USD fell to around $1.1160, its lowest level in 17 months, before recovering toward the $1.12 area.
At the same time, markets have sharply reduced expectations for a Federal Reserve rate hike later this month following weaker US employment data and more cautious guidance from Fed officials. The combination of European political risk and changing US rate expectations is keeping major currency pairs volatile.
European Political Risk Weighs on the Euro
The euro came under heavy pressure in early Asian trading, reaching around $1.1160 before stabilizing.
France remains the biggest source of concern. French government bonds have continued to sell off, pushing the spread between French and German 10-year yields above 150 basis points at points during the session. Reuters reported that the French-German spread exceeded 150 basis points, highlighting growing investor concerns over France’s fiscal and political outlook.
The widening spread is important for the euro because it signals a higher risk premium for French assets and raises concerns about fragmentation within the eurozone bond market.
Want to gain deeper insights into market trends, price movements, and key market drivers? Explore our latest Market Analysis for in-depth analysis.
France’s Fiscal Concerns Keep Investors Cautious
France is facing persistent concerns over its fiscal position, while political uncertainty is increasing ahead of next year’s presidential election.
The market is particularly sensitive to the possibility that the country’s next government could pursue policies that investors view as less supportive of fiscal consolidation.
That uncertainty has pushed French borrowing costs higher and contributed to pressure on the euro.
The euro’s decline is therefore not simply a currency move. It reflects a broader repricing of political and sovereign risk across parts of the eurozone.
Spain Adds Another Political Risk
Spain has added to the uncertainty after Prime Minister Pedro Sánchez called a snap general election for November 29.
The decision followed the defeat of his minority government’s housing measures in parliament. The election creates another source of political uncertainty for investors at a time when markets are already focused on fiscal developments in France.
Spain’s 10-year government bond yield remained well below France’s, meaning the market is currently treating the French situation as the larger sovereign-risk concern.
Nevertheless, another major eurozone economy entering an election cycle can make investors more cautious toward the currency.
Want to understand the latest economic developments and their impact on global financial markets? Explore our Macroeconomic News for the latest updates and insights.
Germany’s AfD Adds to the Political Risk Picture
Germany is also attracting attention after the AfD won 43.8% of the vote in Saxony-Anhalt’s September state election, becoming the largest party in the state parliament with 39 of 83 seats.
The result does not give the AfD an outright majority, but it represents a significant change in the political balance of the state.
The newly elected parliament is now beginning its work, with the AfD holding the largest parliamentary group. For financial markets, the broader issue is whether increasing political fragmentation across major European economies could make fiscal and policy decisions more difficult.
Fed Rate-Hike Expectations Have Fallen Sharply
While European politics are weighing on the euro, changing expectations for the Federal Reserve are influencing the dollar.
Markets have sharply reduced the probability of another Fed rate hike at the October 27–28 meeting following weaker-than-expected US employment data and more cautious comments from Fed officials.
Reuters reported that the market was pricing only about an 18% probability of an October hike, down sharply from the previous week.
Other market measures have also shown a significant move toward a pause. The shift has helped limit the dollar’s upside despite the euro’s political problems.
The next major catalyst is the US inflation report, particularly the September CPI data scheduled for October 14.
Want to stay informed about interest rate decisions, monetary policy, and central bank developments? Explore our Central Banks section for the latest updates.
EUR/USD Price Action
EUR/USD reached approximately $1.1160 during Asian trading before recovering toward the $1.12 area.
The pair’s previous yearly low near $1.1215 is now an important reference point, although the earlier move below that level means traders are likely to focus on whether EUR/USD can establish a sustained recovery above the $1.12 area.
On the upside, the $1.1280 region represents an important near-term reference level from the current trading range.
The broader trend remains sensitive to both European political headlines and US Treasury yields.
G10 Currency Performance
| Currency | Key Market Driver |
|---|---|
| Euro | French and Spanish political risk |
| Japanese yen | US Treasury yields and JPY157–158 area |
| Sterling | Third consecutive weekly decline |
| Canadian dollar | Wide US-Canada yield differential |
| Australian dollar | Sensitivity to US rates and risk sentiment |
| US dollar | Mixed, with yields and Fed expectations driving moves |
The Japanese yen recovered some ground before the weekend but remains sensitive to movements in US Treasury yields. USD/JPY recently moved toward JPY158, with support around JPY157.50–157.60.
Sterling has now recorded a third consecutive weekly decline, although momentum indicators suggest the currency may be approaching oversold conditions.
The Canadian dollar remains under pressure. The US two-year yield premium over Canada has widened substantially, making the relative interest-rate advantage of US assets an important factor for USD/CAD.
The Australian dollar remains particularly sensitive to changes in US yields because of its relatively high yield profile among G10 currencies.
Emerging-Market Currencies Remain Sensitive to US Rates
The Mexican peso has shown limited benefit from recent dollar movements, while the offshore yuan has traded within a relatively narrow range.
India is attracting greater attention because markets are increasingly pricing a rate hike by the Reserve Bank of India.
Reuters reported that nearly 60% of economists surveyed expect the RBI to raise its benchmark repo rate by 25 basis points this week, from 5.25% to 5.50%. Market pricing has been even more decisive.
The decision could become an important catalyst for the Indian rupee, particularly as global central banks remain focused on inflation and currency stability.
Bond Markets Remain a Major FX Driver
Government bond yields remain central to currency-market movements.
At the end of last week, the US 10-year Treasury yield rose while German, French and Spanish 10-year yields declined. The French-German spread, however, remained exceptionally wide.
This creates two opposing forces for the euro.
Higher European yields can normally support a currency, but when the increase is driven by political or fiscal risk rather than stronger economic fundamentals, the effect can be negative.
That distinction is particularly important for France.
Want to stay ahead of important economic releases and events that can impact financial markets? Explore our Economic Calendar Events for key upcoming developments.
Gold and Oil Remain Volatile
Gold experienced a volatile session before the weekend, initially rising toward $4,226.50 before falling by roughly $100.
It has since traded in a relatively narrow range around $4,125–$4,170.
WTI crude also remains elevated. November WTI found buyers near $88 before recovering above $92 and later consolidating around the $89.30–$91.90 range.
For FX traders, movements in oil remain important because energy prices can influence inflation expectations, interest-rate expectations and the currencies of commodity-producing economies.
Key Economic Data to Watch This Week
The US ISM Services PMI is one of the main releases on today’s calendar, while the September CPI report will likely be the more important US inflation catalyst ahead of the October FOMC meeting.
Other events to watch include:
- Canada September services and composite PMI
- Mexico’s economic data and October 8 CPI
- India’s RBI policy decision
- Japan’s services and composite PMI
- UK services and composite PMI
- Eurozone economic indicators
- Developments surrounding Spain’s November 29 election
The US ISM Services release and several of these regional indicators are scheduled for the beginning of the week.
What Traders Should Watch Next
For FX traders, the most important variables are likely to be:
1. EUR/USD around the $1.12 area
A sustained break below recent lows would keep the broader downside pressure in focus.
2. The French-German yield spread
A further widening could signal increasing sovereign-risk concerns.
3. US Treasury yields
Changes in yields can quickly alter the dollar’s relative attractiveness.
4. Fed rate expectations
A further decline in expectations for an October hike could limit dollar strength.
5. US September CPI
A stronger-than-expected inflation reading could revive rate-hike expectations, while softer inflation could reinforce expectations for a pause.
6. European political headlines
France, Spain and Germany remain important sources of potential volatility for the euro.
Market Impact
The euro remains under pressure as French fiscal and political risks combine with uncertainty surrounding Spain. However, sharply lower expectations for an October Fed hike are limiting the dollar’s upside.
For traders, EUR/USD remains highly sensitive to the French-German yield spread, US Treasury yields and upcoming US CPI data. A further deterioration in European sovereign risk could weigh on the euro, while softer US inflation could provide some relief by reducing support for the dollar.
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