Euro weakens due to risks in France and Yemen

The euro began the new week with a noticeable decline on FOREX. On Monday, October 5, the EUR/USD pair dropped to 1.1161 dollars, its lowest level in 17 months. Pressure on the European currency is intensifying from several factors—from problems with France's public finances to a new round of tension in the Middle East.

The main European problem now remains France. Political uncertainty in the country is combined with serious budget issues. The government needs to achieve spending cuts of approximately 54 billion euros in the 2027 budget draft, but the parliament remains deeply divided, and protests and strikes are taking place against the budget measures.

Against this backdrop, the yield on 10-year French government bonds has approached 5%, and the spread between French and German rates has reached levels last seen during the Eurozone debt crisis.

This is a negative signal for the euro. Investors fear that political disagreements will hinder Paris from implementing the necessary budget consolidation. At the same time, the cost of servicing France's public debt is rising. Therefore, France's problems are beginning to be perceived by the market not only as an internal French issue but also as a potential risk for the entire Eurozone.

An additional risk factor is the situation in Yemen. On October 4, the internationally recognized government of Yemen announced the start of a major military operation against Iran-backed Houthis. The stated goal of the operation is to retake territories controlled by the movement, including areas near the strategically important Bab el-Mandeb Strait.

The escalation around the Bab el-Mandeb Strait poses a serious threat to international shipping. Any disruptions in vessel traffic through the Red Sea could increase transportation and energy costs, as well as support oil prices. For Europe, this is especially sensitive, as rising energy costs could simultaneously strengthen inflationary pressure and worsen economic prospects.

Thus, the euro is now facing double pressure: internal—due to the political and debt crisis in France—and external—due to heightened geopolitical risks in the Middle East. At the same time, the dollar is receiving support as a safe-haven asset.

In the coming days, traders' attention will be focused on the situation around the French budget, the dynamics of French bond yields, the development of the conflict in Yemen and the Red Sea, as well as new economic data from the US and the Eurozone. If political risks in France continue to intensify and the situation around Bab el-Mandeb worsens, pressure on EUR/USD may persist.

For now, the technical picture also remains unfavorable for the euro: after falling to 1.1161 dollars, the market will closely monitor whether the pair can stabilize above the 1.11 dollar area or continue moving toward new multi-month lows.