Euro struggles as French fiscal risks, strong US Dollar weigh ahead of Fed Minutes

The Euro (EUR) is facing challenges as it grapples with fiscal risks in France and the strengthening US Dollar, ahead of the Federal Reserve's (Fed) minutes release. The EUR/USD pair is currently trading around 1.1195, marking a 0.57% decline for the day, near its lowest level in 17 months. The US Dollar Index (DXY) is at 102.30, a level last seen in April 2025.

The benchmark 10-year US Treasury yield has reached 5.365%, its highest since 2002, before slightly easing to 5.31%. Factors contributing to the rise in borrowing costs include higher oil prices, concerns over government debt, and a robust US growth outlook. The Federal Reserve has maintained a restrictive policy stance, increasing interest rates by 25 basis points to a range of 3.75%-4.00% last month.

However, weaker-than-expected employment and Personal Consumption Expenditures (PCE) inflation figures have dampened pressure for further rate hikes at the upcoming October 27-28 meeting. Concerns over France's public finances are weighing heavily on the Euro, leading to higher borrowing costs and broader bond spreads. ABN Amro strategists note that Euro weakness is often triggered by sharp increases in government bond yields due to fiscal or political concerns, which can create a "contagion" effect on the currency.

The Eurozone's fiscal and political uncertainties may limit the European Central Bank's (ECB) ability to pursue aggressive tightening. Despite this, markets still anticipate additional rate hikes, as elevated energy prices keep inflation risks high, even as policymakers express caution.