Euro Under Pressure Amid Political Uncertainty and Strong Dollar

The euro has come under renewed pressure this week, with the EUR/USD pair dropping to near 1.1160, its lowest level since May 2025. The pair has since recovered slightly, but the near-term outlook remains bearish for the single currency. The lack of significant economic data this week means that political and fiscal concerns, along with bond and oil markets, will drive the EUR/USD forecast.

Political uncertainty in Europe is a major factor weighing on the euro. After last week's sell-off triggered by France, Spain's Prime Minister Pedro Sánchez has called an early election, adding to the region's instability. France remains the biggest concern, with rising borrowing costs and political divisions straining government finances. Investors are wary of the debt burdens carried by major eurozone economies, particularly France, where political divisions make fiscal restraint difficult.

The euro's weakness is evident across various pairs, not just against the dollar. EUR/CHF and EUR/GBP have also seen sharper declines, indicating that the pressure is broader. The economic calendar offers little distraction from these concerns. European Central Bank officials speaking this week must maintain a hawkish tone to anchor inflation expectations while monitoring French bond markets for further deterioration.

The dollar remains well-supported, despite a broad consolidation mode. Friday's softer US jobs report did not alter expectations for a Federal Reserve rate increase, now anticipated in December. Hawkish remarks from Fed officials, the FOMC minutes due Wednesday, or stronger data could further strengthen the dollar. Technical analysis shows EUR/USD bouncing from key support levels, with resistance around 1.1325 to 1.1350. Below current support, the pair could target 1.1200, 1.1100, or even 1.1000 if the macro backdrop does not improve.