Euro Dips to Fresh Low Amid Spain Election Uncertainty

The euro dipped to a fresh low against the U.S. dollar before bouncing back as political uncertainty in Spain escalated. Reports that Spain's government was preparing an early election sent EUR/USD to its lowest point since May 2025. Hedge-fund selling in Asia and triggered option barriers deepened the fall, but the pair later recovered to trade above 1.1200.

Prime Minister Sánchez confirmed a snap election for November 29 after parliament rejected his housing plan. While the official announcement had less impact than initial reports, the political risk adds to existing concerns about the euro. The European Central Bank's Chief Economist Philip Lane suggested that costlier energy and higher borrowing costs are slowing demand, potentially limiting the need for further rate hikes.

Euro area inflation reached 3.8% in September, its highest since September 2023. The ECB's deposit rate stands at 2.50% after recent increases, with markets pricing in two to three more hikes over the coming year. A reduction in expected hikes could weaken the euro, particularly as political risks in Spain and France mount.

Upcoming economic data, including euro area retail sales for August and the ECB's account of its September meeting, will provide further clarity on the monetary policy outlook. Retail sales are forecast to rise 0.2% month-over-month, partially recovering from a 0.6% fall in July. The ECB's account of its September meeting will be published on Thursday, alongside another speech by Lane.