Euro struggles as French fiscal concerns and firm US Dollar dominate

EUR/USD reverses earlier gains on Friday and remains on track for a fifth consecutive weekly decline as the US Dollar (USD) rebounds from the previous day’s pullback. Concerns over France’s fiscal outlook also continue to weigh on sentiment toward the Euro (EUR). At the time of writing, EUR/USD trades around 1.1195, near levels last seen in May 2025.

The US Dollar regains ground as US Treasury yields resume their advance following Thursday’s sharp decline. Strong demand at a 30-year Treasury auction and a modest pullback in oil prices also helped ease pressure on bonds after US President Donald Trump ruled out renewed strikes against Iran before the November midterm elections.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 102.30 after recovering from an intraday low of 101.92. Meanwhile, the benchmark 10-year US Treasury yield rises by 4.2 basis points to 5.261%, remaining below the 5.365% peak reached earlier this week, its highest level since 2002.

Analysts at ING caution that “Dollar drops may continue to prove short-lived and quite small in size as bond markets remain fragile and the Fed narrative is hawkish.” They add that the “French premium isn’t likely to leave the euro very soon,” warning that “risks remain of a test of 1.110 in the near term” for EUR/USD. ING also noted that “we don’t feel Marine Le Pen’s huge fiscal tightening promise is enough to turn the tide for French bonds, and the euro may keep suffering from the French situation for longer.”

Crude Oil remains well above its pre-war levels, keeping inflation risks elevated and supporting expectations of additional interest-rate increases by both the Federal Reserve (Fed) and the European Central Bank (ECB).

Recent Fed communication also keeps the door open to further tightening as policymakers seek to return inflation to the central bank’s 2% target. According to the CME FedWatch Tool, traders widely expect the Fed to leave interest rates unchanged at 3.75%-4.00% at its October 27-28 meeting, while pricing in an 85% probability of a rate hike in December.

Fresh US economic data offer mixed signals but keep inflation concerns in focus. The preliminary University of Michigan Consumer Sentiment Index fell to 46.3 in October from 48.1, missing expectations of 47.6. The Consumer Expectations Index, however, improved to 47.3 from 46.3. Inflation expectations moved higher, with the 1-year measure rising to 4.7% from 4.6% and the 5-year measure increasing to 3.5% from 3.4%.

Meanwhile, ECB officials remain divided over the pace of further tightening. Some policymakers point to limited second-round effects from higher Oil prices, while others warn that inflation risks could require additional rate hikes. Officials continue to stress that future policy decisions will depend on incoming data.