Euro Plummets as French Fiscal Stress and Bond Market Worries Deepen
The euro is under significant pressure, with the EUR/USD exchange rate falling below 1.12 for the first time since May 2025. The single currency has also weakened nearly 2% against the Swiss franc and around 1% against the Japanese yen, indicating that investors are seeking traditional safe havens beyond just the dollar. The main driver of this decline is the deteriorating bond-market conditions in the euro area, particularly concerns over France’s fiscal outlook and 2027 budget negotiations. The French-German yield spread has widened to its highest level since 2012, reigniting fears of broader stress across European sovereign debt markets.
The absence of a clear catalyst for recovery in French assets is adding to the euro’s woes. Political uncertainty and financing concerns continue to cloud the outlook, making sovereign spreads a bigger driver of FX price action. Additionally, the euro is receiving little support from interest rates, as expectations for further ECB tightening have moderated due to concerns over higher borrowing costs and elevated energy prices.
Meanwhile, the US dollar is benefiting from firm inflation signals and growing fiscal stress in Europe. Despite a weaker-than-expected payroll report, which cut the probability of an October Fed hike from 48% to 18%, the dollar remains supported by higher long-term yields and inflation concerns. The euro’s struggles are providing an additional source of dollar strength, as investors remain wary of the French fiscal premium and wider Italian spreads.
Sterling, on the other hand, has started the week on a firmer footing, with GBP/EUR breaking above 1.18 for the first time since early July. This move is largely driven by relative strength, as concerns over French public finances weigh on the euro. Investors are giving Prime Minister Burnham’s government the benefit of the doubt ahead of the upcoming Budget, viewing the UK’s fiscal outlook as less problematic than some of its European counterparts.