Euro Under Pressure as Fragmentation Fears Weigh on ECB Tightening Path
The Euro (EUR) faced intense selling pressure at the start of the week as investors grew increasingly concerned about France's fiscal outlook. Analysts at OCBC noted that rising fragmentation fears are tightening financial conditions through higher sovereign borrowing costs and wider risk premia. These concerns have raised the risk that the European Central Bank (ECB) may become more cautious about further policy tightening, as the central bank weighs the impact of widening spreads on the broader Eurozone. As a result, the Euro has come under renewed pressure, with EUR/USD falling to its weakest level since May 2025.
Reflecting broad-based selling pressure, EUR/GBP fell more than 0.3%, EUR/JPY lost 0.6%, and EUR/CAD declined 0.4% in the European morning. Meanwhile, the US Dollar (USD) managed to regain its footing after a weaker initial reaction to the US Nonfarm Payrolls (NFP) report. The NFP rose by 29K in September, missing market expectations of 90K. Although the Unemployment Rate edged higher to 4.2%, the probability of a 25 basis points (bps) Federal Reserve (Fed) rate hike in October declined below 20%, as per the CME FedWatch Tool.
Economists at DBS argue that the recent USD’s three-week rally is running out of monetary-policy fuel, as senior Fed officials have pushed back against expectations for a back-to-back hike at the October 28 FOMC meeting. They note that market attention is likely to rotate back towards concerns over debt supply, fiscal sustainability, and Treasury-market credibility. DBS stresses that higher term premia driven by these concerns need not support the USD, unlike higher yields driven by Fed tightening.
Gold (XAU/USD) fell more than 3% and closed the second consecutive week in negative territory. The precious metal benefited from a risk-averse market atmosphere to start the week and clung to modest recovery gains above $4,160. USD/JPY fluctuated in a tight channel above 157.50 in the early European session on Monday. Japanese Chief Cabinet Secretary Minoru Kihara stated there are no plans for a fresh release of crude oil from national reserves, despite a G7 agreement to release 100 million barrels of diesel and crude from emergency reserves.