The Euro (EUR/USD) rebounded from its lowest level since May 2025, regaining all of Monday's losses to trade just above 1.1250, as French bonds stabilized and the US Dollar weakened across the board [1]. This recovery followed France's submission of its 2027 budget to parliament by Tuesday's deadline, which helped narrow the yield spread between French and German 10-year bonds to about 1.3 percentage points from a peak of nearly 1.6 points on Friday [1]. The budget projects France's interest bill at approximately €91 billion in 2027, surpassing planned spending on defense or education [1]. The recent widening of the French-German yield gap had pressured the Euro and led traders to reduce expectations for another European Central Bank (ECB) rate hike [1].
Market pricing for an ECB rate hike in October has dropped sharply, with money markets now assigning only a 14% probability, down from about 60% in late September, although the likelihood of a move by year-end remains near 80% [1]. ECB Chief Economist Lane stated that high energy costs have not yet caused significant knock-on effects on wages and broader prices, suggesting a more cautious approach to further tightening [1]. August retail sales in the Eurozone rose 0.1% month-on-month, below the 0.2% forecast, and were up 0.8% year-on-year, with fuel volumes down 3.7% from a year earlier, indicating that the energy shock is influencing consumer behavior [1].
The National Assembly in France is scheduled to vote on the first part of the budget on October 20, just nine days before the ECB's October 29 policy decision [1]. The ECB's September 10 meeting, which raised the deposit rate to 2.50%, may appear more hawkish in its forthcoming account than current market pricing suggests [1]. Upcoming speeches by ECB officials and the release of the FOMC minutes are also being closely watched for further policy signals [1].
In comparison, the British Pound (GBP/USD) also climbed, driven by a weaker Dollar and easing US Treasury yields, but the Euro's recovery was more notable given its recent lows [2]. The EUR/GBP pair remained largely unchanged as both currencies benefited from the Dollar's retreat [2].
CONCLUSION
The Euro's rebound from a 17-month low was supported by easing French bond yields and reduced expectations for an imminent ECB rate hike, following the submission of France's 2027 budget. While the market now sees a lower probability of an October ECB hike, upcoming policy meetings and economic data remain key for future direction. The overall sentiment is cautious, with the Euro regaining ground but facing ongoing uncertainty around monetary policy.