Euro finds support from softer US Dollar, French fiscal risks linger

• EUR/USD gains as the US Dollar retreats from recent highs.
• Markets await US inflation figures to assess the likelihood of further Fed tightening.
• France’s fiscal concerns complicate the ECB outlook as inflation risks persist.

EUR/USD gains ground on Tuesday as the US Dollar (USD) retreats from recent highs, giving the Euro (EUR) some breathing room despite persistent concerns over France’s fiscal and political outlook. At the time of writing, the pair trades around 1.1192, up 0.33% on the day.

An earlier pullback in US Treasury yields dragged the US Dollar lower. Yields have since partly recovered, limiting further losses in the Greenback as traders turn their attention to the US Consumer Price Index (CPI) report, due on Wednesday.

The US Dollar Index (DXY), which measures the currency against six major peers, trades around 102.25 after touching 102.61 on Monday, its highest since April 2025. The benchmark 10-year yield rebounds to around 5.21% from 5.17%, remaining below last week’s peak of 5.36%, its highest since 2002.

September’s headline CPI is expected to rise 0.6% MoM, up from 0.4% in August, with annual inflation forecast to climb to 3.7% from 3.4%. Core CPI, which excludes food and energy, is projected to increase 0.2% MoM, easing from 0.3%, although the annual rate is expected to edge up to 2.5% from 2.4%.

The inflation report arrives ahead of the Federal Reserve’s (Fed) October 27-28 meeting. The CME FedWatch Tool shows an 80% probability that interest rates will remain unchanged at 3.75%-4.00%, while traders still anticipate another hike before year-end.

Elevated energy prices remain a source of inflation pressure as diplomatic efforts between Washington and Tehran show no breakthrough on reopening the Strait of Hormuz.

The European Central Bank (ECB) faces similar inflation pressures, keeping further interest-rate hikes on the table. However, higher energy costs and a widening spread between French and German government bond yields amid France’s fiscal concerns add to risks to growth and financial stability, complicating the central bank’s policy decisions.

Analysts at Nordea note that the ECB’s September account, which was released before the latest bout of bond-market volatility, “nevertheless confirmed that policymakers saw inflation risks as tilted to the upside, while avoiding any commitment to a future rate path.” They add that the “subsequent widening of French spreads adds a downside risk to growth, but the account remains consistent with our baseline of further 25bp rate increases in December and March.”