Euro starts the week amid new threats to the European economy
The euro starts the new week under pressure from several factors at once: the escalating confrontation between the US and Iran, rising borrowing costs for the French government, and uncertainty surrounding the energy truce between Ukraine and Russia announced by Donald Trump.
Against this backdrop, investors prefer to exercise caution, and the US dollar retains support thanks to demand for safe-haven assets and concerns about a new round of inflation.
According to Reuters on October 12, the dollar held near its highest levels in the past 18 months. The euro, meanwhile, was under pressure both due to the situation in the Middle East and due to problems with French public finances.
US and Iran: oil remains a key factor for the currency market
One of the main sources of uncertainty for FOREX remains the conflict around Iran. Risks of oil supply disruptions and threats to shipping in the Middle East are forcing market participants to revise expectations regarding inflation and the future policy of central banks.
For the euro, this situation carries several risks at once. First, more expensive oil increases costs for European companies and households. Europe depends on energy imports, so a prolonged rise in fuel prices could worsen the region's trade balance and slow economic activity.
Second, accelerating inflation may limit the ability of the European Central Bank (ECB) to ease monetary policy. If high energy prices start to steadily affect the cost of goods and services, it will be harder for the regulator to cut rates to support the economy.
Third, expensive oil supports inflation concerns in the US and may force the Federal Reserve to maintain a tighter monetary policy. Higher American rates and Treasury yields make the dollar more attractive for international investors.
It is precisely the combination of energy risks and expectations regarding Fed policy that creates an unfavorable background for the European currency. In late September, Reuters noted that amid the Washington-Tehran standoff and rising oil prices, the euro fell to about $1.1370, and later, in early October, reached lower levels.
French government bonds: an additional blow to the euro
Another serious pressure factor on the single European currency remains the situation with France's public debt. Investors are increasingly assessing Paris's ability to reduce the budget deficit amid political disagreements and the upcoming 2027 presidential elections.
In early October, the yield on French ten-year government bonds rose to about 4.9% per annum. At the same time, the spread between French and German bonds of similar maturity exceeded 150 basis points — the highest level since the end of 2011.
Rising yields mean investors are demanding a higher premium for holding French debt. For the state, this means increased cost of new borrowing, while for financial markets it intensifies concerns about the sustainability of public finances of the eurozone's second-largest economy.
For the euro, this creates a dual situation. On the one hand, higher yields on European bonds may make euro assets more attractive. On the other hand, if yields rise because of political instability and concerns about public debt, it signals increased risks.
The second factor is especially important now. In early October, the euro fell below the 1.12 dollar mark, reaching its lowest level in about 17 months. Although there were subsequent recovery attempts, the French debt problem continued to limit the potential of the European currency.
Trump's energy truce: could it support the euro?
Additional attention in the currency market was drawn to Donald Trump's initiative for a so-called energy truce between Ukraine and Russia. On October 11, Trump announced that the parties had agreed to immediately stop attacks on energy infrastructure.
President of Ukraine Volodymyr Zelensky said that Kyiv supports the cessation of such strikes, but expects details of the American initiative and insists on mutual compliance with the agreements. At the same time, reports of attacks on Ukrainian energy facilities after the announcement of the truce cast doubt on its immediate implementation. For the currency market, this initiative is important primarily through its possible impact on energy prices.
If the truce indeed leads to a reduction in attacks on oil refineries and energy infrastructure, this could reduce supply disruption risks and ease pressure on oil prices. Lower fuel costs would be a positive factor for the European economy, which is sensitive to imported energy.
The first reactions of the oil market have already demonstrated this possibility. On Monday, October 12, Brent crude was trading near $103.55 per barrel after falling about 1% in Asian trading. However, prices remained high due to ongoing tensions in the Middle East. At the same time, it is premature to count on a quick and sustainable strengthening of the euro solely due to Trump's initiative. As long as doubts remain about the implementation of the truce and the US-Iran standoff continues to pose risks to global oil supplies.