Euro Hovers Near 17-Month Low! French Fiscal Risks and Fed Rate Hike Expectations Combine to Pressure the Currency, Downtrend May Persist; Market Bearish Sentiment Rises to a One-and-a-Half-Year High

Title context: Euro Hovers Near 17-Month Low! French Fiscal Risks and Fed Rate Hike Expectations Combine to Pressure the Currency, Downtrend May Persist; Market Bearish Sentiment Rises to a One-and-a-Half-Year High Text: With the European Central Bank set to announce its rate decision later on Thursday, the euro is trading near its lowest level since May 2025. As of press time, the euro fell 0.15% against the dollar to $1.1140 per euro. Meanwhile, both the options market and technical indicators suggest the euro faces the risk of further declines. Longer-dated option pricing shows traders are the most bearish on the euro since March 2025. France's fiscal challenges and newly emerging political risks in Europe have put the euro on track for its worst two-month performance since late 2024. The market expects ECB officials to keep rates unchanged on Thursday to assess the impact of elevated energy prices and slowing economic growth momentum on inflation. Market expectations for future Fed rate hikes have also enhanced the dollar's appeal relative to the euro. French Fiscal Risks and Repricing of Fed Policy Expectations Weigh on the Euro ING FX strategist Francesco Pesole said the euro-dollar exchange rate "has already shown it is not ready to break below the 1.11 threshold for now." He said: "We expect that today's ECB decision risk event will not trigger a new round of sharp declines in the euro." However, technical momentum could still further increase downward pressure on the euro and potentially push it to a 17-month low. The so-called "fear-greed indicator" which measures the ratio between buying strength and selling strength has remained in bearish territory for the longest stretch since January 2025. The cumulative scale of the current bearish run has also become the third-largest bearish phase in the past six years. A key indicator measuring market positioning and sentiment shows that market concerns about France are structural in nature and more evident in longer-term bets. Although one-week risk reversals show traders' bearishness on the euro has eased somewhat in recent sessions, one-year risk reversals indicate that the premium required to bet on a euro decline is still widening. FX traders familiar with the relevant trades said recent short-term bearish option structures have been closed out. They also noted that there is selling interest at euro-dollar levels below 1.11.