The euro remained steady near $1.1230 on Monday as political turmoil in France overshadowed potential economic recovery. Large-scale protests across France, with over 500,000 participants, turned violent over rising living costs and deteriorating public services. President Emmanuel Macron's call for calm had little effect, raising concerns about the government's ability to stabilize finances without stifling growth.
The euro's stability was further influenced by mixed signals from the European Central Bank (ECB). ECB President Christine Lagarde noted that higher borrowing costs could slow growth and reduce inflation. The ECB has raised rates twice in four months, with another hike expected in December. While higher rates can support the currency, they also risk tightening financial conditions and hampering economic activity.
Across the Atlantic, traders saw a 16% chance of an October Federal Reserve rate hike but a 92% likelihood for December. This expectation of further tightening has weakened some dollar support, though it remains a hurdle for a sustained euro-dollar recovery. The upcoming preliminary October PMIs will be crucial in assessing business activity in Europe and the US, with September's eurozone composite reading at 53.1, indicating expansion.
Investors are closely watching the yield gap between French and German government bonds. A widening gap would signal increased risk premiums for holding French debt, further complicating the euro's outlook. The combination of political uncertainty, mixed rate expectations, and economic data will shape the euro's trajectory in the coming weeks.