Euro Falls as French Fiscal Worries and Fed Lift Dollar

Key Moments

Euro Retreats as French Fiscal Concerns Dominate

The EUR/USD pair weakens to roughly 1.1235 during Asian trading on Friday, extending the Euro’s decline as investors react to mounting fiscal concerns in France. The move comes ahead of key US labor market data for September, which is set to attract significant market attention later in the day.

French 10-year government bond yields pull back after touching their highest level since 2002 in the prior session. The earlier surge followed the French government’s presentation of its 2027 budget, which heightened worries over the country’s fiscal trajectory. At the same time, a renewed rise in oil prices on a prolonged US-Iran war is described as pushing yields higher by reinforcing inflation pressures.

“Clearly the market is not pricing for a hawkish Fed,” said Prashant Newnaha, senior rates strategist at TD Securities. “This is a flight-to-safety move spurred on by developments in Europe. In this scenario expect the dollar index and the yen to strengthen at the same time,” Newnaha added.

Fed’s Hawkish Tone Supports Dollar Strength

Signals from Federal Reserve officials continue to underpin the US Dollar, aided by a sustained rise in US Treasury yields. On Thursday, Dallas Fed President Lorie Logan argued that the central bank still needs to raise short-term rates by at least 50 basis points to make policy “modestly restrictive” and steer inflation back toward the Fed’s 2% objective.

Market pricing reflects these hawkish expectations. According to the CME FedWatch Tool, investors now see nearly a 24.9% chance of a rate increase in October and a 79.4% probability of another hike in December.

With this backdrop, traders are closely watching Friday’s US employment data for September. Consensus projections suggest Nonfarm Payrolls (NFP) will show 90,000 new jobs, while the Unemployment Rate is expected to remain at 4.1%. Any evidence of a softer labor market could weigh on the Greenback and potentially offer some relief to EUR/USD.

Rabobank: Euro Fails to Benefit from ECB Hawkishness

Analysts at Rabobank highlight how changing expectations for Federal Reserve policy have influenced currency moves in recent months. They argue that the “turnaround from expectations of Fed easing to Fed tightening can account for much of the USD’s strong performance during the summer and into last month.” They add that the “lacklustre performance of the EUR has also played a part in driving EUR/USD in the months since the war commenced,” noting that, just as the earlier “attraction of the single currency likely underpinned flows out of the USD during parts of 2025,” the Euro’s “inability to draw strength from the hawkish position of the ECB since the start of the Iran war has likely helped underpin the USD.”

Rabobank links this to growing worries on the European side. They state that “even though the ECB brought forward its tightening cycle, and despite the resilience of the Eurozone economy this year, the market is concerned about growth risks in view of the Eurozone’s position as an energy importer.” In their assessment, “European political uncertainties are also likely contributing to the EUR’s lacklustre performance,” further limiting the single currency’s ability to capitalize on tighter monetary policy.

Logan’s Remarks Push Fed Sentiment Deeper into Hawkish Territory

Fed’s Logan delivered a speech that was assessed as more hawkish than her historical norm. The FXS Speechtracker score for her remarks came in at 9.2, above a historical average of 8.1, indicating a stronger inclination toward tightening relative to past communications.

Her comments that higher long-term yields may partly reflect elevated term premiums – which could, in theory, lessen the need for additional hikes – sit alongside explicit calls for at least 50 bps more in rate increases and multiple further moves to secure price stability. This combination underscores a distinctly hawkish backdrop for the US Dollar. Logan’s view that policy is not yet restrictive, coupled with what she described as a strengthening economic expansion and a balanced labor market, leaves room for further tightening despite uncertainty around the ultimate level of rates required to achieve 2% inflation.

The broader FXS Fed Sentiment Index climbed by 1.68 points to 136.59, moving further above the neutral 100 mark. This shift, aligned with the elevated FXS Speechtracker reading, signals that markets are increasingly anticipating additional Fed tightening, a development that remains supportive for the US currency against its major counterparts.

Technical Outlook: EUR/USD Bias Stays Bearish Despite Oversold Signals

From a technical standpoint, EUR/USD continues to trend lower on the daily chart, trading well under both the middle band of the Bollinger Bands (20, 2) and the 100-day simple moving average (SMA). This configuration points to a clearly bearish short-term setup, with multiple resistance layers overhead.

The spot rate is edging closer to the Bollinger lower band, while the 14-day Relative Strength Index (RSI) stands at 17.21, deep in oversold territory. This suggests that selling pressure remains dominant, although the likelihood of a corrective rebound is increasing.

On the upside, the first notable resistance is aligned with the Bollinger middle band around 1.1460, followed by the 100-day SMA near 1.1515. A stronger barrier is seen at the Bollinger upper band around 1.1705, where more aggressive selling interest would likely emerge if any recovery gains momentum.

On the downside, immediate support is located at the Bollinger lower band near 1.1215. A decisive move below this level would point to a continuation of the prevailing downtrend, while holding above it could allow EUR/USD to stabilize and potentially stage a consolidation phase before retesting the overhead resistance zone.