Behind the Euro's Decline: Energy, the ECB, and French Debt

The macro point

The euro lost 1.21% against the dollar in five sessions, then slipped below 1.12 this Monday, the lowest since May 2025. Yet the single currency is also down against the pound, Swiss franc, and yen: the dollar isn’t solely to blame. This decline has a fundamental cause, the energy shock, and two immediate causes: the ECB's caution and tension over French debt.

The energy shock has weakened the euro since February, without explaining the entire recent decline. The eurozone imports most of its energy and pays for it in dollars: as prices rise, its purchases of American currency increase. This rise in energy prices also fuels inflation, at 3.8%: thus, inflation and euro weakness have the same origin.

The first immediate cause is the ECB, which has raised its deposit rate twice since June but does not intend to hasten the next increase. Christine Lagarde defended a "measured response": according to her, the rise in long-term rates will slow activity, and nothing indicates at this stage that rising energy costs are affecting wages. The market now expects the next increase in December: according to ECB Watch, its probability drops from 60% to 18% for October and stands at 73% for December. The euro thus loses the support of an imminent tightening.

The second immediate cause is French debt. The ten-year Franco-German yield spread widened by 34 basis points in one week, to nearly 141 points on Friday. A national debt weighs on the common currency mainly when investors fear contagion; Reuters notes this fear, and Spanish political uncertainty maintains it. However, we believe, like State Street, that this tension remains a French issue: it pressures the euro without signaling a eurozone crisis.

Barring an ECB surprise, three paths could lead to a euro rebound: a drop in energy prices, a relaxation of French debt issues, or a weakening dollar. The latter path was tested Friday: the United States created only 29,000 jobs, yet the dollar holds firm against the pound and yen. Energy remains expensive, and the French budget discussions only begin on October 13: the other two paths are thus not clearer.

Technical point

Against the dollar, the euro broke through two thresholds downward. The 1.13 level fell last week, closing at 1.1253 on Friday; the year's low, at 1.1216, was breached this Monday in the Asian session, the rate reaching 1.116. The next markers are now around 1.11 and then 1.10.

Against the franc, the euro hit its yearly high on Wednesday, at 0.9486, before losing 1.33% on Thursday; it is now worth about 0.929 franc. According to StoneX, carry positions were unwound. Carry trading involves borrowing a low-interest-rate currency, here the franc, to invest in a higher-yielding one; when volatility rises, these positions are often closed, and francs are repurchased. We believe the euro will remain exposed to such buybacks as long as volatility stays high.

However, carry trading does not explain the overall decline, as the euro also fell against currencies with no financing role. Last week, the euro lost 1.17% against the pound, as much as against the franc, and 0.45% against the Canadian dollar; this Monday, it trades at 0.846 pounds, near its annual low of 0.8455. For an importer paying in dollars, waiting for a euro rebound is akin to betting on cheaper energy, easing French debt concerns, or a weakened dollar. Hedging part of the exposure, then the balance at predetermined dates, limits this bet without eliminating it.

The supports and resistances displayed below respectively indicate the lows and highs within which the rates should evolve during the week.

Announcements to follow

The week brings two meeting minutes: the Federal Reserve on Wednesday, the ECB on Thursday. They will indicate what each central bank was considering before last Friday's figures on U.S. employment and European inflation. Oil will also be a focus, as OPEC+ has kept its targets unchanged and Tehran maintains the Strait of Hormuz closed. Thus, a decline in energy prices, one path to a euro rebound, remains uncertain.

Below are the publications and events that should significantly impact currency rate movements.

The information presented in this publication is provided solely for informational purposes and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used as a basis or considered as an incitement to engage in any investment.