Euro Weakens on France Fiscal Risks and Fed Rate Hike Uncertainty

The Euro weakened below 1.1250 against the US Dollar in early Asian trading on Monday, as concerns over France’s fiscal risks weighed on the currency. The EUR/USD pair dipped to around 1.1245, driven by fears over France’s unstable fiscal outlook. French Prime Minister Sébastien Lecornu’s minority government proposed a controversial €54 billion austerity budget for 2027 to prevent a potential credit downgrade or sovereign default. However, analysts doubt the government can pass the budget without making significant concessions. France’s public debt now stands at 119% of GDP, and French government bonds have faced selling pressure amid rising policy rate expectations and political risks. The 10-year French bond yields hit their highest level since 2002 last week.

Meanwhile, traders reduced their expectations of a Fed rate hike in October following weaker US jobs data. The probability of unchanged rates at the Fed’s October meeting rose to 77.9% from 74% before the data release. Analysts at Standard Chartered noted that underlying price pressures remain contained, with core inflation rising modestly from 2.2% in January to 2.5% in September. They argued that the European Central Bank (ECB) is likely to wait for December projections before making any policy rate changes.

On the other hand, a hawkish tone from Fed official Christopher Logan boosted expectations of further rate hikes, supporting the US Dollar. Logan emphasized the need for tighter policy, suggesting that the policy rate must rise by at least 50 basis points and potentially more to restore price stability. The FXS Fed Sentiment Index climbed to 136.59, reinforcing a hawkish stance and supporting the Dollar against lower-yielding currencies.

Technical analysis indicates that EUR/USD maintains a negative tone, with the pair trading below the 100-day simple moving average and the Bollinger Bands’ middle line. The Relative Strength Index (14) sits at 20.2, in oversold territory, suggesting that while downside pressure dominates, the sell-off may be becoming stretched. Immediate support is located at the lower Bollinger band near 1.1200, with resistance levels at 1.1440 and 1.1510.