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

• EUR/USD retains small gains in the American session, supported by continued US Dollar weakness.
• Lower Treasury yields weigh on the Greenback, although expectations of additional Fed tightening restrict the decline.
• The Euro’s rebound remains constrained by uncertainty over France’s budget and worries about a growth slowdown.

Modest gains in EUR/USD persist through Tuesday’s American session, with the US Dollar (USD) unable to regain momentum after its recent retreat. The advance remains capped, however, as fiscal and political difficulties in France leave sentiment towards the Euro (EUR) vulnerable. The pair is trading near 1.1223 at the time of writing, a gain of 0.10% for the day.

A retreat in US Treasury yields from recent peaks continues to weigh on the Greenback. Having neared 103 last week, its highest reading since April 2025, the US Dollar Index (DXY) is now around 101.76, a daily decline of 0.23%. The index measures the Greenback against a basket of six major currencies. At the same time, the benchmark 10-year US Treasury yield is near 5.08%, compared with around 5.36% earlier this month.

Further declines in the US Dollar and US Treasury yields nevertheless appear constrained. Rising energy costs are intensifying inflation risks, strengthening expectations that the Fed could raise rates again before year-end. On Tuesday, West Texas Intermediate (WTI) Oil advanced towards $100, its highest level in more than a month. Concerns about supply disruptions have grown 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 October 27-28 meeting after September’s 25-basis-point (bps) rate increase. Of the 100 economists surveyed in a Reuters poll released on Tuesday, 94 expect rates to stay at 3.75%-4.00% this month. All respondents, however, predict a rate rise in December.

In Europe, some relief has come from an easing of tensions in France, where authorities imposed curfews after widespread protests. The focus nonetheless remains on the proposed 2027 budget and lawmakers’ ability to reach agreement on steps to strengthen public finances.

With inflation still above the European Central Bank’s (ECB) 2% target, energy-related price risks leave scope for further rate increases. Following two hikes this year, economists broadly anticipate another increase in December, with a pause expected in October.

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-led inflation without undermining economic activity.