The euro extended its sharp decline against the U.S. dollar on Tuesday, sliding to its weakest level in 17 months as investors grew increasingly anxious about the fiscal trajectory of the eurozone. The EUR/USD pair dropped to 1.1162, marking a decline of more than 4.67% from its September peak. The sell-off has accelerated as government bond yields across the region surge, reflecting mounting concerns over debt sustainability and political instability.
European bond yields climb on fiscal worries
In France, the ten-year government bond yield jumped to a multi-year high of 4.99% last week, while German and other European yields have also been on the rise. This upward pressure on borrowing costs is a clear signal that markets are demanding higher compensation for perceived risks in the region. The fiscal strain is compounded by political turbulence, with Spanish Prime Minister Pedro Sanchez reportedly considering an early election after losing a crucial housing vote. According to Bloomberg, his cabinet and senior officials support the move, adding to the sense of uncertainty.
France has also seen significant protests in recent weeks, further unsettling investors. A Lombard Odier analyst noted that bond and currency markets are clearly signaling discomfort about the rising instability of the French government and the erosion of the country's fiscal anchor ahead of the 2027 elections.
Economic growth lags inflation
The broader economic backdrop remains challenging. The European Central Bank projects the eurozone economy will grow by just 0.9% this year, a pace that trails the current inflation rate, which has stayed above 2% amid the US-Iran crisis. This combination of sluggish growth and persistent price pressures complicates the ECB's policy path and adds to the euro's headwinds.
Fed minutes in focus
Market participants are now turning their attention to the release of the Federal Reserve's minutes from its latest meeting, scheduled for Wednesday. The minutes are expected to offer additional clues about the central bank's policy trajectory. However, their impact on the EUR/USD pair may be muted, as the economic landscape has shifted considerably since that meeting. Recent data showed that core Personal Consumption Expenditures (PCE) softened in August, and Friday's jobs report revealed that the U.S. economy added only 29,000 jobs last month, far below the expected 90,000. The unemployment rate also ticked up to 4.2%.
These figures suggest that the Fed is unlikely to raise interest rates again this year, contrary to earlier analyst expectations. A less hawkish Fed could provide some support for the euro, but the currency's near-term outlook remains clouded by European fiscal and political risks.
Technical analysis points to further downside
From a technical perspective, the EUR/USD pair has broken below a key support level at 1.1391, which had held since July of last year and again in March and April this year. This bearish breakout confirms the downward momentum. The pair is now trading at the 38.2% Fibonacci retracement level and has slipped below the 50-week moving average. The Supertrend indicator has also turned red, signaling a bearish trend. The next major target for sellers is the psychological level of 1.1000.
Given the confluence of fundamental and technical factors, the path of least resistance for the euro appears to be lower. Investors will be watching the Fed minutes for any surprises, but the broader trend remains bearish for the single currency.
This article is for informational purposes only and does not constitute financial advice.
