EUR/USD Approaches Year-to-Date Low Under Dual Pressure from Energy Shock and Political Risks
nashnova research
EUR/USD has dropped roughly 2% this month to around 1.137, a two-month low, squeezed by surging European gas prices and rising political risk — whether gas costs ease before winter will set the pair's next direction.
Why has the euro slid so fast?
In August EUR/USD was approaching 1.20; it now trades near 1.137, within striking distance of the year's low.
Two forces are working at once: a Fed rate hike has boosted the dollar, while energy costs and political uncertainty drag on the euro.
This means → the euro is not being knocked down by a single event — "stronger dollar" and "weaker euro" are running in parallel, amplifying the move.
How serious is Europe's political risk?
Germany: far-right gains in recent state elections are pressuring Chancellor Friedrich Merz, potentially forcing him to water down his reform agenda.
France: high-debt concerns and a political deadlock ahead of the 2027 presidential election have pushed the French 10-year bond spread over AAA-rated German Bunds past 110 basis points.
In plain terms = the wider that gap, the less the market trusts France's fiscal position. Bank of America estimates every additional 10 bp of spread widening maps to a 0.4% drop in EUR/USD.
Why is natural gas the pivotal variable?
The Iran war has disrupted LNG shipments through the Strait of Hormuz, pushing European gas prices above €80 per megawatt-hour this month — the highest since late 2022.
BlueBay senior portfolio manager Kaspar Hense notes most commodity forecasters see a range of €85–100; if that materialises, EUR/USD "could easily fall to 1.12."
This means → analysts broadly agree the euro cannot rally until gas prices soften — and that condition is nowhere in sight.
What is the options market signalling?
The euro's three-month risk reversal — an options-pricing gauge of bullish vs. bearish sentiment — posted its largest weekly drop since the Iran war began last week.
This reflects traders accelerating purchases of euro puts, hedging against further downside.
What cards do euro bulls still hold?
Markets currently price at least one more ECB rate hike this year, and the eurozone economy is still showing some resilience.
ING maintains a year-end EUR/USD forecast of 1.16; Rabobank's Jane Foley says she is reassessing her prior three-month target of 1.16.
In plain terms = the bull case rests on "the ECB is still hiking and the economy hasn't cracked," while the bear case is "energy is too expensive and politics too messy" — the path of gas prices before winter is the make-or-break test.
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