EUR: Under renewed pressure
The mood toward the euro has deteriorated sharply. EUR/USD has fallen below 1.12 for the first time since May 2025, while the single currency is down almost 2% month-to-date against the Swiss franc and around 1% against the Japanese yen. Those moves suggest investors are not merely buying dollars, but actively seeking traditional European and global safe havens.
The catalyst remains the worsening bond-market backdrop across the euro area. Concerns surrounding France’s fiscal outlook and 2027 budget negotiations have pushed the French-German yield spread to its widest level since 2012, reigniting fears that stress could spread more broadly across European sovereign debt markets. While current moves are nowhere near the scale of the eurozone debt crisis, investors are increasingly wary of contagion risks. EUR/USD has often struggled when investors begin pricing fragmentation risk across the bloc, with widening Italian-German spreads providing some of the clearest historical examples.
What is striking is the absence of a clear catalyst for recovery. There is no obvious trigger for a rebound in French assets, while political uncertainty and financing concerns continue to cloud the outlook. As a result, sovereign spreads are becoming a bigger driver of FX price action.
The euro is also receiving little support from rates. Expectations for further ECB tightening have moderated as investors become more conscious of the growth implications of higher borrowing costs and elevated energy prices.
USD: French stress supports despite weak payrolls
The US dollar enters October near its 2026 high, supported by firm US inflation signals and growing fiscal stress in Europe. Thursday’s stronger ISM manufacturing report and elevated prices paid kept another Fed hike in play, while French budget concerns pushed the OAT-Bund spread to 154 basis points. EUR/USD fell 1% to 1.125 last week, helping DXY reach a new year-to-date high of 102.2 before Friday’s payroll report dented the dollar’s momentum.
The US added just 29,000 jobs in September, wage growth slowed and unemployment rose to 4.2%. Markets cut the probability of an October hike from 48% to 18%, pulling two-year yields lower and weakening the dollar on Friday. December remains priced at 85%, however, while higher long-term yields show that inflation, fiscal concerns and term premium continue to support the dollar beyond the next Fed meeting.
The euro side of the story provides a separate source of dollar strength. France’s fiscal watchdog challenged the assumptions behind the government’s deficit plan, while wider Italian spreads showed that the pressure was spreading beyond French assets. EUR/USD recovered only modestly after payrolls, suggesting investors were unwilling to unwind the French fiscal premium even as expectations for near-term Fed tightening fell.
This week’s services ISM and FOMC minutes will test both sides of the dollar rally: whether US price pressures remain firm and whether policymakers continue to favor a December hike despite weaker hiring. For October, firm services inflation, hawkish minutes and continued pressure on French bonds would support DXY toward the 102.5–103 level, while softer US data or narrower European spreads would favor a move back below 101.5.
The Q4 view remains moderately constructive, but another payroll gain below 50,000 would weaken the December case, while sustained EUR/USD weakness below 1.12 would keep an important source of dollar support in place.
GBP: Back above rarefied territory
Sterling has started the week on a firmer footing, with GBP/EUR breaking above 1.18 for the first time since early July. The move is notable not just technically but historically: the cross has spent less than a quarter of the past decade above this level, and potentially presenting an attractive window for UK importers.
The driver remains largely one of relative rather than outright UK strength. Concerns surrounding French public finances and broader eurozone fiscal dynamics continue to weigh on the single currency, while investors have become more comfortable giving Prime Minister Burnham’s government the benefit of the doubt ahead of next month’s Budget. Markets are not embracing the UK’s fiscal outlook; they are simply viewing it as less problematic than some of its European counterparts.
Against the dollar, the story is less compelling. GBP/USD remains anchored near the low-1.32s, with the greenback benefiting from a combination of attractive yields and safe-haven demand. That leaves cable caught between a still-supportive UK yield backdrop and a dollar that continues to offer both carry and defensive qualities.
The broader support for sterling remains intact. UK yields continue to rank among the highest in the developed world, supporting carry demand in a market where volatility remains unusually low. However, the valuation picture is becoming stretched, particularly against the euro, and the sustainability of recent gains will increasingly depend on whether the UK can maintain fiscal credibility heading into the Autumn Budget.
For now, sterling’s strength owes more to relative politics, relative yields and relative fiscal perceptions than to a decisive improvement in the UK economic story itself.
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Calendar: October 05-09
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
