EUR/USD remains under pressure as dollar strength and European risks weigh on the euro

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Euro remains vulnerable to dollar strength

Eurozone inflation and German industrial weakness complicate ECB outlook

The European economy continues to face an unfavorable combination of accelerating inflation and an uneven industrial recovery. The preliminary estimate of September inflation in the eurozone stood at 3.8% year-over-year, compared with 3.2% a month earlier, with energy prices rising by 18.8%, while core inflation remained around 2.5%.

In Germany, consumer price growth accelerated to 3.3% in September, while industrial orders for August fell by 10.6% compared with July, although a significant part of the decline is explained by the effect of large contracts in the previous month. For the ECB, this means persistent inflation risks in the absence of convincing acceleration in economic activity.

French debt concerns add pressure to the euro

In France, growing investor distrust of fiscal policy adds to inflation concerns. Preliminary INSEE data showed consumer inflation accelerating to 3.0% in September from 2.4% in August, while the harmonized rate reached 3.4%. At the same time, the yield on 10-year French government bonds approached 5%, while the spread over German Bunds widened to approximately 140 basis points.

France's public debt is estimated at around €3.5 trillion, or nearly 120% of GDP, which significantly complicates budget preparations amid parliamentary disagreements and protests against spending cuts. Despite a slight decline in European bond yields on October 12, investors remain doubtful about the possibility of a rapid restoration of fiscal discipline.

The ECB currently sees no grounds for intervention in the bond market, as signs of systemic contagion from the French crisis remain limited. However, the persistent sovereign risk premium continues to weaken the euro's investment appeal.

U.S. inflation expectations support the dollar

In the U.S., attention is gradually shifting from the weak September employment report to the upcoming release of the Consumer Price Index on October 14. Economists expect headline inflation to accelerate to approximately 3.7% year-over-year, with core inflation around 2.5%, which could strengthen the arguments of supporters of the Fed's restrictive monetary policy.

Following September's rate increase to a range of 3.75–4.00%, the market estimates the probability of another hike at the October 28 meeting at approximately 19%, while additional tightening in December is already partially priced in. The yield on 10-year U.S. Treasuries remains near 5.3%, providing the dollar with a yield advantage over the euro, although the U.S. bond market is closed today for Columbus Day.

Additional support for the U.S. currency comes from geopolitical tensions in the Middle East and demand for safe-haven assets, and at this stage, as noted in EUR/USD remains under pressure as European debt risks limit recovery, the risks of a break below support around 1.1170 and a decline toward 1.1150–1.1130, at a minimum, continue to prevail; a break above resistance at 1.1210 will lead to a rise toward 1.1240–1.1250. The outlook for the pair remains negative.

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