EUR/USD at a 17-month low: French and Spanish politics, a cautious ECB and the road to October 29
The euro is heading for its fifth straight weekly loss against the dollar. Earlier this week EUR/USD touched 1.1161 (Monday, October 5), its weakest level in about 17 months, and it is now down close to 5% since the start of the year. The pair has since stabilised a little and is trading back around 1.12, but the drivers behind the slide are still in place. This piece looks at why the euro is under pressure and what could turn it around.
1. Politics is back in the euro's price
The biggest change in recent weeks is not economic data. It is politics in two of the euro area's largest economies.
2. The rate gap still favours the dollar
The European Central Bank raised its deposit rate to 2.50% in September in response to energy-driven inflation. That is still far below the Fed's 3.75%–4.00% range, and the Fed's own minutes this week showed most officials leaning toward another hike before year-end. A gap of well over a percentage point keeps carry flows tilted toward the dollar.
On October 8 several ECB officials sounded less eager to tighten again, and markets trimmed bets on another ECB hike. In theory that is euro-negative. In practice the euro bounced to about 1.1225 the next day, because the dollar also softened as US yields eased. The lesson is that the pair is reacting to the relative story: what the ECB does matters less than what it does compared with the Fed.
3. Energy is a double-edged sword
With Brent oil above $100, the euro area faces the classic energy-importer squeeze: inflation goes up while growth slows. Higher inflation might justify more ECB hikes, but the growth hit makes the central bank reluctant to deliver them. For the currency that combination is usually negative, because it worsens the trade balance and the growth outlook at the same time.
4. The flows behind the drop
Part of Monday's slide was mechanical. Asia-based funds sold euros for dollars during thin Asian trading, which reportedly triggered stops and option-related hedging around nearby levels and pushed the pair lower faster than fundamentals alone would explain. That matters for traders: moves driven by positioning often partially retrace once the pressure fades. The pace of the decline has slowed since the low.
Levels and dates to watch
Bottom line: The euro's weakness is a mix of politics (France and Spain), a still-wide rate gap with the US and an energy shock that hurts growth more than it helps the ECB. A real turnaround probably needs calmer French spreads or softer US data. Until then, rallies toward 1.13 are likely to meet sellers.
This article is for information only and is not investment advice.
The euro is heading for its fifth straight weekly loss against the dollar. Earlier this week EUR/USD touched 1.1161 (Monday, October 5), its weakest level in about 17 months, and it is now down close to 5% since the start of the year. The pair has since stabilised a little and is trading back around 1.12, but the drivers behind the slide are still in place. This piece looks at why the euro is under pressure and what could turn it around.
1. Politics is back in the euro's price
The biggest change in recent weeks is not economic data. It is politics in two of the euro area's largest economies.
- France: Persistent government instability and strained public finances ahead of the 2027 elections are pushing investors to demand more to hold French debt. The gap between French and German 10-year borrowing costs has reportedly widened to around 150 basis points, the widest since the 2011 euro-crisis era. When the spread between a core member and Germany widens like this, global investors usually trim their exposure to the whole currency, not just French bonds.
- Spain: After a heavy defeat in parliament, people close to the government have floated the idea of an early election. Spain had been one of the euro area's growth bright spots. Fresh political uncertainty there takes away part of the "periphery is fine" argument that had supported the euro.
2. The rate gap still favours the dollar
The European Central Bank raised its deposit rate to 2.50% in September in response to energy-driven inflation. That is still far below the Fed's 3.75%–4.00% range, and the Fed's own minutes this week showed most officials leaning toward another hike before year-end. A gap of well over a percentage point keeps carry flows tilted toward the dollar.
On October 8 several ECB officials sounded less eager to tighten again, and markets trimmed bets on another ECB hike. In theory that is euro-negative. In practice the euro bounced to about 1.1225 the next day, because the dollar also softened as US yields eased. The lesson is that the pair is reacting to the relative story: what the ECB does matters less than what it does compared with the Fed.
3. Energy is a double-edged sword
With Brent oil above $100, the euro area faces the classic energy-importer squeeze: inflation goes up while growth slows. Higher inflation might justify more ECB hikes, but the growth hit makes the central bank reluctant to deliver them. For the currency that combination is usually negative, because it worsens the trade balance and the growth outlook at the same time.
4. The flows behind the drop
Part of Monday's slide was mechanical. Asia-based funds sold euros for dollars during thin Asian trading, which reportedly triggered stops and option-related hedging around nearby levels and pushed the pair lower faster than fundamentals alone would explain. That matters for traders: moves driven by positioning often partially retrace once the pressure fades. The pace of the decline has slowed since the low.
Levels and dates to watch
- Support: 1.1160 (this week's low). A clean break opens the door toward the 1.1100 round number.
- Resistance: 1.1250–1.1300. The pair needs to reclaim that area to signal that the five-week slide is over.
- French bond spreads: Watch the OAT–Bund spread as a live gauge of political stress. Further widening would likely keep the euro capped.
- US inflation data: A soft US print would weaken the dollar side of the trade and could give the euro room to recover.
- ECB decision, October 29: This comes one day after the Fed's October 28 decision, so the euro will have to absorb two central banks in two days.
Bottom line: The euro's weakness is a mix of politics (France and Spain), a still-wide rate gap with the US and an energy shock that hurts growth more than it helps the ECB. A real turnaround probably needs calmer French spreads or softer US data. Until then, rallies toward 1.13 are likely to meet sellers.
This article is for information only and is not investment advice.