The euro traded at 1.1192 against the dollar on Wednesday, October 7, reflecting a decline of 71 pips or 0.63% from Tuesday’s close of 1.1263. The session range extended from 1.1266 at its peak to 1.1186 at its trough. That low stands 26 pips above Monday’s 1.1160 trough, marking the weakest level for the single currency since May 19, 2025. Tuesday provided a temporary relief. The pair climbed to 1.1275, marking its largest one-day gain in seven weeks, following the frontrunner in next spring’s French presidential election unveiling plans to reduce government spending by €25 billion annually. French 10-year yields declined by 11 basis points to 4.76%, the dollar weakened, and U.S. Treasury yields moderated. By Wednesday morning in Europe, every aspect of that movement had been completely reversed. The pair breached 1.1225, subsequently fell below 1.1200, and established a position around the 1.1190 level in anticipation of the U.S. session. Two forces are collaborating. On the European side, France’s fiscal position has elevated its borrowing costs to the highest levels observed since the eurozone debt crisis. Meanwhile, Spain is approaching a snap election, and Brent crude priced at $101.94 is exerting pressure on income within an energy-importing bloc. On the American side, the 10-year Treasury yield stands at 5.345%, marking its highest point since 2002, while the Dollar Index is recorded at 102.45, a level not observed since April 2025.
The euro is being sold for European reasons while the dollar is being purchased for American ones, with neither set of motivations showing any signs of easing on Wednesday. Tuesday’s bounce represented a relief rally within a prevailing downtrend that has seen the pair decline from 1.2016 in late January to a position just 30 pips shy of a 17-month low. Until French spreads narrow in a lasting manner or U.S. yields reach their peak, the most straightforward trajectory appears to be through 1.1160 toward 1.1068. The Federal Reserve’s September minutes will be released at 2:00 p.m., following a $39 billion 10-year Treasury auction. Both events are positioned on the dollar side of the pair, presenting greater risks for euro bulls compared to bears. The euro commenced 2026 at approximately 1.1750 and surged to 1.2016 by the end of January, marking its peak for the year. That peak coincided with a weak dollar and a European Central Bank that characterised inflation as being in a favourable position. The pair has experienced a decline of 824 pips, representing a 7% decrease since that time, and it has fallen 5% year to date. The decline occurred in phases. The initial phase occurred in the wake of the U.S.-Iran conflict that emerged in late February, resulting in an increase in oil prices and steering investors toward the dollar. By mid-July, the EUR/USD exchange rate had declined to 1.1420, marking a one-year low at that point, despite the European Central Bank transitioning from a stance of maintaining rates to one of increasing them. A partial recovery through August brought the pair back above 1.1500, and on September 18 it remained quoted at 1.1487.
The second leg has exhibited a more rapid pace. EUR/USD experienced a decline of 3% in September. It commenced October at 1.1330 and has experienced a decline of an additional 138 pips over the course of five sessions. Along the way, it breached a triple-bottom support at 1.1362 that had been maintained throughout the summer. The rapidity of that breakdown propelled the daily relative strength index to 19 at the beginning of this week, an extreme reading that facilitated Tuesday’s bounce. The sequence of the past four sessions illustrates the market’s behaviour at these levels. On Friday, October 2, the pair was valued at 1.1245. On Monday, it declined to 1.1160 during Asian hours, subsequently recovered, and closed at 1.1221, reflecting a 0.28% loss. On Tuesday, it experienced a rally to 1.1275 before concluding the day at 1.1263. On Wednesday, it declined to 1.1192. Two features are particularly noteworthy. The first observation is that Monday’s decline to 1.1160 occurred without a distinct rise in downward momentum, which explains why the pair rebounded by 61 pips by the end of the trading day. The second point is that the recovery on Tuesday halted 10 pips shy of 1.1285, a threshold that would have indicated the decline was stabilising. The market assessed the stamina of sellers and concluded that they remain robust. At 1.1192, the euro is positioned at the lower boundary of its 2026 range, which spans from 1.1160 to 1.2016, with a mere 32 pips distinguishing it from a new 17-month low.
The euro’s weakness originates in Paris. French public debt is anticipated to attain 122% of gross domestic product in the forthcoming year. The 2027 budget unveiled last week aims to reduce the deficit from 5.4% of GDP to 5.0%, a decrease that would prevent the shortfall from expanding to 6.5%, yet would not stabilise the debt ratio. The government’s own fiscal watchdog approached the proposals with scepticism. The bond market rendered its verdict swiftly. The French 10-year yield reached 4.989% on October 1, within a basis point of 5% for the first time since 2002. It closed Friday at 4.856%, opened Monday at 4.917%, and eased to 4.76% on Tuesday. The spread over German 10-year debt has expanded to 146 basis points, marking the widest gap since 2011, following the most significant weekly increase in 17 years. For the first time, French yields surpassed those of Italy and Greece. Political factors are the underlying cause of the market’s scepticism toward the reported figures. France is set to conduct a presidential election in the upcoming spring season. None of the principal candidates had outlined a comprehensive strategy regarding which expenditures would be reduced or how the debt ratio would be stabilised, which is why Tuesday’s €25 billion-a-year proposal from the leading contender influenced market movements.
A specific figure from the candidate most associated with fiscal populism was sufficient to reduce French yields by 11 basis points in a session and elevate the euro by 54 pips from Monday’s close to Tuesday’s high. One day later, the sense of relief had diminished. A campaign pledge is not a budget, and the legislative calendar provides ample opportunity for disillusionment. The two budget bills were scheduled to be submitted to the National Assembly by October 6. Plenary debate is set to commence on October 13. The critical votes are expected to occur between late November and mid-December, with a revised budget being the most probable result in a parliament lacking a stable majority. A scheduled rating review this month, with France currently at Aa3, introduces an additional point of concern for the market. Each of those events represents a potential catalyst for broader spreads. The EUR/USD has closely followed the dynamics of the French-German spread over the past three weeks, experiencing declines when the spread widens and rebounds when it narrows. That relationship persisted once more on Wednesday.
