Euro holds steady as markets assess France’s budget risks and the Fed outlook

• Continued US Dollar weakness leaves EUR/USD holding on to modest gains in the American session.
• Lower Treasury yields weigh on the Greenback, although expectations of additional Fed tightening curb its decline.
• The Euro’s rebound remains constrained by uncertainty over France’s budget and worries about slowing growth.

Trading around 1.1223 at the time of writing, EUR/USD is up 0.10% on the day during Tuesday’s American session. The modest advance comes as the US Dollar (USD) struggles to recover following its recent retreat. Further gains remain constrained, however, by fragile sentiment towards the Euro (EUR) amid France’s fiscal and political difficulties.

At around 101.76, the US Dollar Index (DXY) is down 0.23% on the day, with falling US Treasury yields keeping the Greenback under pressure. The index, which measures the US currency against a basket of six major currencies, approached 103 last week, its highest reading since April 2025. The benchmark 10-year US Treasury yield is now near 5.08%, compared with around 5.36% earlier this month, as yields retreat from their recent highs.

Rising energy costs are nevertheless heightening inflation risks, reinforcing expectations that the Fed could raise rates again before year-end and seemingly limiting further declines in the US Dollar and US Treasury yields. On Tuesday, West Texas Intermediate (WTI) Oil advanced towards $100 to its highest level in more than a month. Concerns about supply disruption have intensified following Houthi attacks on Saudi energy infrastructure and an increase in attacks on vessels in the Strait of Hormuz.

Despite those risks, traders anticipate a pause at the Fed’s 27-28 October meeting after September’s 25-basis-point (bps) rise. In a Reuters poll released on Tuesday, 94 of 100 economists expected rates to stay at 3.75%-4.00% this month. Every respondent forecast a rise in December.

In Europe, conditions in France have become calmer since authorities introduced curfews in response to widespread protests, providing some relief. The focus nonetheless remains on the proposed 2027 budget and whether lawmakers can reach agreement on measures to strengthen public finances.

With inflation still above the European Central Bank’s (ECB) 2% target, energy-related price risks leave further rate rises under consideration. Following two increases this year, economists widely anticipate an October pause before another rise in December.

Higher borrowing costs, however, also threaten growth. Speaking on Saturday, ECB President Christine Lagarde said, “While growth has been resilient, financing conditions have tightened.” The remarks highlight the challenge of containing energy-driven inflation without undermining economic activity.