Euro weakens below 1.1250 on fiscal concerns, US NFP data looms

The Euro (EUR) experienced a decline to approximately 1.1235 during European trading hours on Friday, driven by concerns over France's fiscal situation. This development comes as the US jobs report for September approaches later on the same day, which will likely influence the Federal Reserve's interest rate decisions. In response to France's unveiling of its 2027 budget, French 10-year government bond yields retreated after hitting their highest level since 2002 in the previous session.

This move was fueled by ongoing worries about France's fiscal outlook and the potential for higher oil prices as a result of a prolonged US-Iran conflict. Prashant Newnaha, a senior rates strategist at TD Securities, noted that the market is anticipating a withdrawal to safety, which could cause the dollar index and the yen to strengthen in tandem.

The Federal Reserve's hawkish signals, coupled with rising US Treasury yields, are contributing to the dollar's upward trajectory. Dallas Fed President Lorie Logan stated that the central bank would need to raise short-term borrowing costs by a minimum of 50 basis points to achieve a modestly restrictive monetary policy and bring inflation back to the 2% target.

Traders are closely monitoring the upcoming US September employment data for further insights into the US interest rate outlook. Recent market expectations include a 24.9% probability of a Fed rate hike in October and a 79.4% chance of an increase in December, according to the CME FedWatch Tool. Analysts at Rabobank attribute much of the USD's strong performance this summer and into the previous month to the shift from expectations of Fed easing to tightening.

They attribute the recent underperformance of the EUR to growing apprehensions about European growth risks and mounting political uncertainties in the Eurozone. Fed President Lorie Logan delivered a more hawkish message, signaling a stronger tightening bias and suggesting that the Fed may need additional rate hikes to secure the 2% inflation target.

The FXS Fed Sentiment Index climbed to 136.59, indicating a significant move towards a hawkish stance and providing further support for the Dollar's strength against major currencies.