Euro Stagflation Risks Mount as Dollar Holds Firm

The euro has continued its decline against the US dollar, with the EUR/USD breaking below its summer lows of around 1.1325. This downturn is largely driven by the dollar's strength rather than any fundamental deterioration in the single currency. The European Central Bank (ECB) President Christine Lagarde's dovish-leaning remarks have also added to the euro's woes.

However, it is not just the euro that is facing challenges. Stagflation risks are mounting in the eurozone, with rising inflation and weakening sentiment further compounding concerns. The recent acceleration of French inflation to 3.0% in September, largely driven by higher energy prices, has threatened to erode household purchasing power.

Germany's labour market picture seems somewhat more encouraging, with unemployment falling by 67,000 in September. However, regional inflation readings suggest that German CPI is also picking up, potentially returning to around 3.1-3.2%.

The sharp sell-off in longer-dated US Treasuries continues to weigh on global risk appetite, offering underlying support to the dollar. This is likely to limit the scope for a meaningful correction in the greenback, even if incoming data disappoints.