Euro Climbs, But French Fiscal Strains Limit Upside

Key Moments

EUR/USD traded near 1.1220 in early Asian dealings on Monday as the pair attempted to recover recent losses.
Ongoing unrest in France and mounting budget concerns were seen as potential headwinds for the Euro.
Markets focused on upcoming ECB and Fed policy meetings, with investors largely expecting no immediate rate moves but monitoring guidance on future tightening.

Euro Attempts Recovery Amid French Political and Fiscal Concerns

EUR/USD edged higher toward 1.1220 in early Asian trading on Monday, retracing part of its recent decline. The advance came against a backdrop of lingering concerns about social unrest and political risks in France, which were seen as limiting the scope for further gains in the common currency. Market participants also awaited the latest round of Germany’s IFO data scheduled for release later on Monday.

According to CNBC, demonstrations across France over the rising cost of living and widening inequality turned violent for a second straight weekend. France’s Interior Ministry reported that about 410,000 people took part in protests across several major cities, including Paris. The persistence of these tensions, alongside worries about France’s deteriorating fiscal position, was cited as a potential source of selling pressure on the Euro in the near term.

ECB Outlook: Policy Steady Now, Further Tightening Still Priced In

The European Central Bank (ECB) was expected to keep its main interest rate unchanged at 2.5% at its October policy meeting on Thursday. However, Reuters indicated that markets had already factored in the likelihood of an additional rate increase before year-end. Traders were poised to study any guidance on the future policy path, particularly in light of ECB President Christine Lagarde’s comments in late September that a moderate policy response to inflation was appropriate.

Fed Expectations: October Pause, Focus Shifts to December

Across the Atlantic, investors widely anticipated that the US Federal Reserve would leave rates unchanged just days before the midterm elections. Data from the CME FedWatch tool showed that markets were pricing in a 90.6% probability that the Fed would hold rates steady at its October meeting on Wednesday, while assigning a 79.4% chance to a rate increase in December.

Central Bank	Upcoming Meeting	Expected Action	Key Probabilities / Pricing
ECB	October policy meeting (Thursday)	Hold benchmark rate at 2.5%	Markets already price in a hike before year-end
Fed	October meeting (Wednesday)	Hold rates	90.6% chance of no change; 79.4% odds of a December hike

Strategists Weigh ECB Tightening Versus France-Specific Risks

Analysts at Brown Brothers Harriman emphasized that “above target Eurozone inflation and a resilient growth outlook give the ECB scope to deliver additional hikes,” and pointed out that “the swaps curve implies nearly 75bps of tightening to 3.25% in the next twelve months.” They argued that this expected policy path “limits policy divergence with the Fed and the drag on EUR/USD.”

At the same time, Brown Brothers Harriman warned that “France’s fiscal troubles can drive EUR/USD down to 1.1000,” highlighting how country-specific concerns could offset the broader support stemming from Eurozone monetary policy expectations.

Fed Communication Keeps Dollar Support Intact

Fed Chair Warsh’s latest remarks were assessed with a score of 5.6/10 on the FXS Speechtracker, marginally below the historical mean of 6.1/10. This indicated a slightly less impactful but generally aligned message relative to past communications. The acknowledgment of being “over-scarred” by the global financial crisis reflected a cautious stance toward risk, even as Warsh discussed structural growth dynamics, an investment upswing spurred by “good policies,” and the role of AI as a near-term source of demand with uncertain implications for employment.

The speech underscored a continued focus on price stability, upcoming “crystalizing” FOMC meetings, and international spillovers, projecting a careful but constructive tone that maintained Dollar-friendly expectations without signaling a firm policy trajectory for the rest of 2026.

The FXS Fed Sentiment Index was unchanged, moving 0.00 points to 127.51, a level described as firmly hawkish. The unaltered yet elevated reading suggested that investors continued to view the Fed’s policy inclination as consistently hawkish. Warsh’s emphasis on output, labor markets, inflation, and financial stability risks reinforced the perception that the Fed would remain vigilant, a setting seen as supportive for the Dollar relative to other major currencies.