Euro sinks to 17-month low – Lagarde calls for a 'measured' ECB approach

The Euro briefly sank below the 1.1220 level on Thursday - its lowest level in 17-months - as investors reacted to both the sell off in debt globally and fears over widening spreads in the common bloc. Focus domestically has been on the stark underperformance in French debt in recent weeks - a byproduct of the country’s worsening fiscal outlook - which has caused the 10-yaer OAT-Bund spread to widen by as much as 40 basis points in a little over three weeks.

With the Senate to weigh in on the budget and the presidential election looming in 2027, there is little to suggest that this divergence could narrow any time soon, which could remain a headwind to the euro.

Some less hawkish rhetoric from ECB President Lagarde has also far from helped the euro’s cause this week. Speaking earlier in the week, Lagarde stressed that the bank should adopt a “measured” approach given tight financial conditions and the limited evidence of second round inflation effects.

While we never really thought an October hike from the ECB was on the cards, a key pillar of support for the euro would clearly be removed if markets began to question the likelihood of a December move - which, for now, remains largely priced in by swaps.