Dollar Buoyed by Risk-Off Flows Amid European Debt Concerns

The US dollar has remained supported in recent sessions despite a dovish repricing triggered by comments from Federal Reserve officials Williams and Jefferson that pushed back against expectations of a rate hike in October. The primary driver of the greenback's resilience has been risk-off flows stemming from European debt concerns.

Attention has centered on France, the eurozone's second-largest economy, where political uncertainty and concerns over the country's large fiscal deficit have pushed French government bond yields higher and widened the spread over German Bunds to its highest level since the eurozone debt crisis. That spread — the extra yield investors demand to hold French debt over Germany's — is widely watched as a gauge of stress in eurozone sovereign debt markets.

A stabilization in French spreads could allow some of the euro's risk premium to unwind and trigger a pullback in the US dollar. Conversely, further widening and contagion to other countries would likely keep the greenback supported.

Geopolitics and US CPI on the Agenda

The US-Iran negotiations remain at a stalemate, though Trump ruled out new strikes before the November elections last week. This week, the US CPI report is on the agenda and could trigger significant moves in the markets, as it is one of the key inflation readings the Federal Reserve weighs in its policy decisions. A hotter-than-expected core CPI reading could bring an October rate hike back on the table and give the US dollar a boost, while a soft report would likely weigh on the greenback in the short term through a fall in Treasury yields.

ECB October Hike Odds Fade, December Still in Play

On the euro side, the probabilities of an ECB rate hike in October have faded following the sharp widening in the French-German bond spread, as policymakers are likely to remain cautious about adding further pressure to already fragile financial markets. However, markets still expect the ECB to raise rates in December, reflecting persistent inflationary pressures driven by higher energy prices.

The latest Eurozone CPI data showed headline inflation surging to 3.8% in September from 3.2% in August, largely due to higher energy prices. Core inflation remained relatively contained, edging up to 2.5% from 2.4%.

Looking ahead, energy prices and developments in the Middle East will remain important drivers of the inflation outlook. Any sustained decline in energy prices could reduce near-term inflation pressure and give the ECB more room to delay further tightening. That would also be positive for the euro on improved risk sentiment and lower Fed rate hike expectations.

France's 2027 Budget Eases Some Concerns

The euro will also remain sensitive to developments in the bond market, particularly the French-German spread. France's government has proposed a 2027 budget targeting a deficit of 5.0% of GDP, supported by spending restraint and higher tax revenues. The target is lower than the previous 5.4% and helped ease market concerns somewhat, although both figures remain well above the European Union's 3% of GDP deficit reference value under the bloc's fiscal rules.

However, the plan still faces parliamentary hurdles, and Eurozone finance ministers and the ECB have urged France to pass a credible budget to restore market confidence. Traders will keep a close eye on France, where improvements would be positive for the euro, while negative outcomes would likely continue to weigh on the single currency.

EUR/USD Technical Analysis – Daily Timeframe

On the daily chart, EUR/USD has been selling off heavily in recent weeks on France's debt woes. The nearest key support sits around the 1.1067 level. A test of that level could see buyers step in with defined risk below it to position for a recovery into the major downward trendline, while sellers will want to see the price break lower to increase bearish bets into the 1.08 handle next.

EUR/USD Technical Analysis – 4-Hour Timeframe

On the 4-hour chart, a downward trendline has defined the selloff since early September. Sellers are likely to continue leaning on the trendline, with defined risk above it, to keep pushing into new lows. Buyers, on the other hand, will look for a break above it to start positioning into the major downward trendline, with the 1.1285 level as the first target.

EUR/USD Technical Analysis – 1-Hour Timeframe

On the 1-hour chart, the pair has been bottoming out since France's proposed budget deficit for 2027 was lowered to 5.0% from 5.4%. A support zone sits around the 1.1160 level. Buyers are likely to continue stepping in around the support, with defined risk below it, to keep targeting a break above the trendline and new highs, while sellers will want to see the price break lower to increase bearish bets into new lows. The red lines define the average daily range for today.

Upcoming Catalysts

The US CPI report is due on Wednesday. On Thursday, the economic calendar features the US PPI, US Retail Sales and the latest US Jobless Claims figures.