The euro traded at $1.1174 at 7:44 a.m. on Thursday, October 8, reflecting a decline of 0.2% for the day and standing 13 pips above Monday’s low of 1.1161, which marks the weakest level since May 2025. The pair commenced the session at 1.1196, reached an initial peak of 1.1204, and was positioned at 1.1195 during early European trading before sellers re-emerged as French bond spreads expanded once more. The dollar index increased by 0.2% to 102.40, approaching the 18-month high of 102.54 established on Monday by a margin of 14 points. The damage over the past month is considerable for a significant currency pair. The EUR/USD exchange rate has experienced a decline of 3.6% since September 8, dropping from a peak of 1.1654 on September 9 to a low of 1.1161 observed on Monday, representing a decrease of 493 pips. It stands at a level that is 7.5% lower than its 52-week peak of 1.2079. In the third week of August, the pair was trading around 1.1700. Three forces are concurrently exerting pressure on the single currency. The first is the bond market within the euro area: the gap between French and German 10-year yields closed Wednesday at 134.4 basis points, an increase of 7 on the day, and widened an additional 5 basis points on Thursday morning. The second aspect pertains to energy. Brent crude surged 4.89% to $105.10 a barrel following President Trump’s assertion that he does not seek a deal with Iran, highlighting the euro area’s heavy reliance on oil imports. The third is the rate gap. The US 10-year Treasury yield reached 5.35%, whereas the German Bund stands at 3.49%, reflecting a 186-basis-point advantage for the dollar.
In contrast, the pair is significantly oversold. The 14-day relative strength index stands at 23, having approached 19 during Monday’s low. Readings of such extremity have mitigated the decline, resulting in the euro’s oscillation between 1.1161 and 1.1277 over the past four sessions rather than continuing its downward trajectory. They have not generated a reversal. Thursday’s calendar introduces two additional inputs. The European Central Bank released the account of its meeting held on September 9-10, during which it increased interest rates by 25 basis points. US initial jobless claims registered at 197,000, falling below the anticipated 200,000 mark. Neither changes the picture: the euro’s problem this month is domestic credit risk and imported inflation, and the dollar is collecting the flows. The decline occurred in clear phases, each associated with a specific event. On September 9, the pair reached a high of 1.1654 and concluded the day at 1.1633. The ECB raised rates the following day, yet the euro declined, closing at 1.1612. A central bank increasing rates in a context where the currency depreciates in response indicates that market participants are prioritising factors beyond the policy rate itself. By September 14, the pair was at 1.1549 following a decline of 0.44%. The second leg arrived with the Federal Reserve. On September 16, the Federal Reserve raised its target range to 3.75% to 4.00%, resulting in a 0.68% decline in EUR/USD from 1.1539 to 1.1466. It remained within the range of 1.1453 to 1.1498 for four sessions, subsequently declining by an additional 0.59% on September 23, ultimately closing at 1.1382. That move resulted in the pair falling below 1.1400, coinciding with French 10-year yields surpassing 4.5% for the first time since 2008.
The third leg exhibited the most pronounced sharpness. After a decline from 1.1391 to 1.1330 during the final week of September, the euro experienced a further decrease of 0.78% on October 1, falling from 1.1330 to 1.1242, reaching a low of 1.1215. That session propelled the pair beyond 1.1300 for the first time since May 2025 and surpassed the 1.1362 level, which had established a triple bottom on the daily chart. Euro area inflation data released the following morning indicated a rise to 3.8%, while French spreads experienced their most significant weekly widening in 17 years. The fourth leg has exhibited considerable volatility as a foundational element. On Friday, October 2, a lacklustre US payrolls report propelled the pair to 1.1286, concluding the session at 1.1254. On Monday, October 5, the announcement of a snap election in Spain caused a decline to 1.1161, followed by a recovery to 1.1223. On Tuesday, there was a 0.33% increase to 1.1260, reaching a high of 1.1277, as Brent fell below $98 and French yields softened. On Wednesday, the pair experienced a decline of 0.53%, dropping from 1.1260 to 1.1200, with a recorded low of 1.1165, as oil prices and yields increased following the release of the Fed minutes. Thursday’s trade at 1.1174 positions the euro at the lower end of the four-day range. Lower highs at 1.1286, 1.1277, and 1.1267, juxtaposed with a stable floor at 1.1161 to 1.1165, delineate a descending triangle. That pattern typically resolves in alignment with the preceding trend.
The primary factor contributing to the depreciation of the euro is the performance of the French government bond market. On September 8, the yield on the 10-year OAT was 4.24%, while the German Bund yielded 3.39%, resulting in a spread of 85.3 basis points. On October 7, the OAT yielded 4.83% while the Bund yielded 3.49%, resulting in a spread of 134.4 basis points. French borrowing costs increased by 59 basis points over the course of a month, in contrast to the 10 basis point rise observed in German costs. The peak occurred on Friday, October 2, when the spread reached 159 basis points intraday, marking the widest level since the 2012 euro crisis. It was recorded at 147 on Monday, decreased to 127.4 on Tuesday as oil prices declined, and then expanded by 7 on Wednesday and an additional 5 on Thursday. France’s 10-year yield reached 4.917% on Monday, approaching a 24-year high. The underlying drivers of the movement are rooted in fiscal and political factors. The French finance ministry anticipates that public debt will reach an unprecedented 119.3% of GDP. The government submitted its 2027 budget on October 6 to a divided parliament that has previously destabilised successive administrations over this very process, with the National Assembly scheduled to address it on October 13. A review of the sovereign rating is set for October 23. A national election is on the horizon for the upcoming year.
For the currency, the mechanism is direct. When investors divest from French debt and acquire German debt, the capital remains within the euro currency. When they sell French debt and buy Treasuries yielding 5.35%, it results in a shift in their investment strategy. The widening spread also tightens financial conditions across the bloc, as French yields serve as a benchmark for corporate and bank funding costs in the euro area’s second-largest economy. A wider spread acts as a rate hike that the ECB opted not to implement, focused within a single country. What distinguishes this episode from that of 2011 is the origin of the information. France is a fundamental issuer. Italy and Spain are exhibiting correlated movements, with their spreads adjusting in tandem. The ECB’s backstop, the Transmission Protection Instrument created in 2022, remains unused, as it was intended to address disorderly movements that are not linked to fundamental factors. The widening, propelled by a budget impasse and an increasing debt ratio, is more challenging to categorise as unwarranted. The euro has closely followed the spread with remarkable precision. The pair’s low on October 5 came with the spread at 147. Tuesday’s bounce to 1.1277 occurred as it narrowed to 127.4. Wednesday’s decline to 1.1165 occurred concurrently with a widening to 134.4.
