Market News

LONDON, Sept. 29 (Reuters) — The euro, trading near its lowest levels of the year against the dollar, is facing pressure from a global energy shock and growing political risks across Europe.

Key Points

• The euro has fallen about 2% in September to around $1.137, after approaching $1.20 in August.
• European gas prices have risen above €80 per megawatt hour, their highest level since late 2022.
• The premium on French 10-year government bonds over German equivalents has risen above 110 basis points.
• A stronger dollar following a U.S. rate rise has added to pressure on the euro.
• Political uncertainty in Germany and France is creating additional risks for the single currency.

Political Risks

The euro's outlook has been complicated by political developments in Europe's two largest economies.

German Chancellor Friedrich Merz is facing pressure following strong results for the far right in recent state elections. The developments could force his government to dilute its planned reform agenda.

In France, markets remain under pressure from concerns over high government debt and political gridlock ahead of the country's 2027 presidential election.

Rabobank senior currency strategist Jane Foley said the euro's outlook was concerning in that environment and that her forecast of $1.16 in three months was under review.

French-German Bond Spread

The premium investors demand to hold French 10-year government bonds over highly rated German debt has risen above 110 basis points.

BofA FX strategists estimate that every additional 10-basis-point widening in the spread could be associated with approximately a 0.4% decline in EUR/USD.

The euro was last trading around $1.137.

Options markets are also showing greater negative positioning toward the euro, with three-month euro risk reversals recording their largest weekly decline since the beginning of the Iran war.

European Energy Prices Key to Euro Outlook

Despite the pressure, there are factors supporting the euro. Markets are pricing in at least one additional euro-zone rate hike this year, while recent economic data has shown greater resilience than expected.

However, high energy prices remain a major concern.

The Iran conflict has disrupted liquefied natural gas shipments through the Strait of Hormuz, pushing European gas prices above €80/MWh this month.

Analysts said gas prices would need to fall for the euro to resume its previous advance, but they do not expect significant relief in the immediate future.

RBC BlueBay Asset Management senior portfolio manager Kaspar Hense said commodity forecasters were generally expecting European gas prices to remain in the €85–€100/MWh range. He added that if prices reached those levels, the euro could potentially fall toward $1.12.

Oil Price Risk

A possible U.S. ban on diesel exports could add to pressure on the euro, although analysts said this was not their main scenario.

ING currency strategist Francesco Pesole said a rise in oil prices toward $115 a barrel would increase pressure on the euro because such levels could heighten concerns about economic growth.

However, he noted that if central banks remain hawkish, the euro should not experience a sharp depreciation.

ING is maintaining its $1.16 year-end EUR/USD forecast.