Euro weakens on political and fiscal uncertainty

The euro has faced renewed pressure this week, with the EUR/USD pair dropping near 1.1160, its lowest point since May 2025. While the pair has recovered slightly from these lows, the near-term outlook for the euro remains bearish. Political and fiscal concerns, along with bond and oil market fluctuations, are the primary drivers of the EUR/USD forecast this week.

Political uncertainty in Europe is escalating, particularly in France and Spain. Spain's Prime Minister Pedro Sánchez called an early election, adding to the existing fiscal instability. France remains the bigger concern, as rising borrowing costs and political divisions strain government finances. Investors are growing wary of the debt burdens in major eurozone economies, especially France, where political divisions complicate efforts to reduce the deficit.

The euro's weakness is evident across various currency pairs, not just against the dollar. Investors are demanding a higher risk premium for holding euro-denominated assets. The economic calendar offers little distraction from these concerns. ECB officials must maintain a hawkish tone to anchor inflation expectations while monitoring potential policy responses to further deterioration in French bond markets.

The dollar remains well-supported, despite a softer US jobs report. Markets still anticipate a Fed rate hike, potentially in December. Wednesday’s FOMC minutes could provide insights into the Fed’s stance on inflation and future rate increases. From a technical perspective, EUR/USD is testing support levels, with key resistances around 1.1325 to 1.1350. If the macroeconomic backdrop does not improve, further declines to 1.1200, 1.1100, or even 1.1000 could be on the horizon.