Newsletter · 2026-10-08 · Ashutosh Agarwal

Euro Sinks to a 17-Month Low as Europe's Politics Pile Up - G10 FX & The Carry Trade - Week of October 8, 2026

G10 FX and carry-trade synthesis for the week of October 8, 2026. The euro hit a 17-month low as French spreads swung 30 basis points on Marine Le Pen's budget plan and Spain floated a snap election, with Deutsche Bank targeting 1.09, EUR/GBP at its lowest since early 2025, Standard Chartered pitching European currencies against the yen, and a UK Budget due October 28.

G10 FX & The Carry Trade

Week of October 8, 2026: Euro Sinks to a 17-Month Low as Europe's Politics Pile Up

On Tuesday, the euro got a rare good day. By Wednesday morning it was gone.

What happened in between tells you most of what you need to know about this market right now.

Marine Le Pen put out her own French budget plan on Tuesday. It promised big deficit cuts and a path back below the EU's 3% limit. Bond investors took the headline at face value for a few hours. The extra yield France pays over Germany to borrow for 10 years shrank to about 127 basis points, down from a peak near 159bp the Friday before. (A basis point is one-hundredth of a percentage point.) EUR/USD jumped to about 1.1277.

Then people read the details. By Wednesday morning the spread was back out to 137bp and the euro was back below 1.12.

Saxo's John Hardy, who called it as it happened, summed up the mood on Wednesday:

"Euro just broadly under pressure here."

The bigger story this week is that the euro's problem is no longer just France. Spain's prime minister floated a possible snap election on Monday. Germany's coalition is weak. And the people who set FX forecasts at big banks are starting to say out loud that the euro could fall a lot further.

TL;DR

• The euro hit a 17-month low. It traded at its weakest level since May 2025 on Monday, down nearly 3.5% against the dollar since early September (CNBC). Deutsche Bank's Ozan Tarman says most people see it going to 1.09 before 1.15.

• A rule of thumb for France and the euro. Bank of America estimates every 10bp of extra French-German spread pushes the euro down about 0.5% against the dollar.

• The Le Pen bounce didn't last. The French spread went from about 159bp (Friday high) to 127bp (Tuesday) and back to 137bp (Wednesday), per Saxo.

• Sterling is winning in Europe. EUR/GBP broke below 0.8455, the lowest since early 2025, with "not much on the chart" in the way of support (Saxo). The pound is beating the euro even with a tough UK Budget due on October 28.

• Dollar-yen is pressing on a ceiling. USD/JPY is above 158, testing the 200-day average at 158.50. Hardy thinks the yen can rally if short-term US yields keep falling.

• The yen-versus-Europe trade is the big idea. Standard Chartered's Steven Englander says if the yen's long slide is over, European currencies are the most exposed. Even a quarter-reversal of the multi-year move "would be a massive move."

• The dollar rally isn't over-loved yet. Bank of America says the dollar is still moving in line with interest-rate gaps, not running ahead of them. Next Wednesday's US inflation report (Oct 14) matters more than last week's soft jobs data.

What's new

1. The euro is now Europe's pressure valve

The best single number of the week came from CNBC's Squawk Box Europe. On Squawk Box Europe Express: "Equities track higher despite soaring sovereign bond yields" (Oct 6), the show cited a Bank of America estimate:

"Every 10 basis point widening in the OAT bond spread could push the currency down by nearly half a percentage point against the dollar."

(An OAT is a French government bond. The "spread" is how much more France pays to borrow than Germany.)

That gives you a simple way to think about the euro. J.P. Morgan said last week that the French spread has widened by roughly 75–80bp since early August. On Bank of America's rule of thumb, that alone is worth about 4% off EUR/USD. That is roughly what happened: the euro is down nearly 3.5% since the start of September, CNBC said.

It isn't only France any more. On Squawk Box Europe Express: "U.S. dollar hits months-long high against euro on European concerns" (Oct 5), the euro sank to a 17-month low after Spanish Prime Minister Pedro Sánchez called an "institutional declaration," which set off talk of a snap election. That followed defeats for two of his flagship housing bills in parliament.

CNBC's anchors ran through the full list of worries: low gas storage going into winter, energy prices still high because of the war with Iran, pressure from Washington to release European diesel and gas stocks, Chinese competition, a weak German chancellor, Spain and France. The summary on the show:

"The bond market angst has now become an FX story as well."

The sell-side calls are getting more bearish. On Bloomberg Surveillance: "Risk Cycles Across Equities, Bonds, and Currencies" (Oct 6), Deutsche Bank vice chair Ozan Tarman said he is short the euro. Deutsche's official forecast is still 1.17, he said, "but I think that's under strain a little bit." His read on the crowd:

"Most people do see it going to 109 before 115. ... At the moment, the wind is with short euro."

He also said something important for anyone waiting for the European Central Bank to rescue French bonds. Even if the ECB did step in, the euro would jump first, "but then I think people take that as a selling opportunity."

Why a rescue isn't simple. The ECB has a tool called the TPI (Transmission Protection Instrument). It lets the ECB buy a country's bonds if their yields rise for reasons the ECB thinks are unfair. On Saxo Market Call: "Rough seas, but calm sailing for equities?" (Oct 5), Hardy explained the catch. The TPI is "not very applicable in France's case because it is running underlying deficits of a large size." In plain terms: France doesn't qualify, because its own spending is the problem.

That leaves Paris in an awkward spot. Hardy noted that Le Pen herself is now calling on the ECB to step in and push French spreads down. "A little bit of irony in there," he said.

Why it matters for a book: The euro is now trading as a gauge of European political risk, not just interest rates. The Bank of America rule of thumb gives you a way to size it: watch the French spread and you have a rough guide to where EUR/USD wants to be.

2. France: the Le Pen bounce, and why it faded

The two Saxo episodes this week give the clearest day-by-day picture of French bonds:

• Friday, Oct 2: The French-German 10-year spread hit about 159bp at the high. The French 10-year yield touched 4.995% before closing near 4.92%.

• Monday, Oct 5: The spread was back near 150bp.

• Tuesday, Oct 6: Le Pen's budget plan landed. The spread tightened "all the way down to 127 basis points or so."

• Wednesday, Oct 7: Back out to 137bp. "I had to scratch out the number that I was going to say there a couple times this morning because it started a lot lower," Hardy said.

What was in the Le Pen plan? On Saxo Market Call: "Europe wobbling again as US posts another all-time high" (Oct 7), Hardy said it touted big headline savings and a promise to get the deficit below 3%. But it would do that partly by cutting contributions to the EU and stripping immigrants of some social support. At the same time, it calls for tax cuts on fuel and keeps the retirement age at 62. Hardy called the age promise "completely out of whack with reality."

Critics said the savings assumptions "are very aggressive," and the market agreed within a day.

A longer view from Market Maker. On Market Maker: "Is France Heading for a Financial Crisis?" (Oct 8), Piers Curran laid out the numbers behind the worry:

• France's 10-year yield is near 5%, the highest in 25 years.

• The spread over Germany, around 150bp, is now wider than Italy's or Greece's.

• France is expected to spend €85 billion on interest in 2027. That's now the biggest line in the budget, ahead of education (€63 billion) and defence (€53 billion).

• France has run a deficit every year since 1974.

• The presidential election's first round is April 18, 2027, with the runoff on May 2.

On Le Pen, Curran said she is "talking to the bond markets" by promising to halve the deficit, while "talking to the voters" with VAT cuts on food and fuel. "That's an equation that doesn't balance," he said. His conclusion is blunt:

"I just think the only way out of this is it's the full-on crisis. It forces change. The system can't change itself."

He called it "France's Liz Truss moment," a reference to the 2022 UK budget that crashed the gilt market.

A new risk: Japanese sellers. Hardy flagged a Bloomberg report that Japanese investors are "a bit overweight, to say the least, on French debt." If they cut back, that "could be a source of selling that could add further stress to the market." This matters for EUR/JPY too (see below).

Why it matters for a book: The French spread is now swinging 10–30bp in a day on political headlines. Until April's election, Le Pen's statements are a direct driver of the euro. A plan that sounds responsible gives a bounce. The details take it back.

3. The yen: is the long slide finally over?

The most interesting new idea this week came from Steven Englander, head of G10 FX research at Standard Chartered, on Bloomberg Surveillance (Oct 6).

He was asked about US Treasury Secretary Scott Bessent's claim that he is "the house": that the US government is in charge of where markets go. Englander's answer was careful:

"There's no point to saying you're the house if you're not the house, because, you know, everybody will know it fast enough."

He suggested Bessent "may have some insight into ... shifting BOJ policy," noting the Bank of Japan "did sound somewhat hawkish at the last meeting." (Hawkish means leaning toward higher interest rates.)

But Englander thinks something else matters more than the BoJ: Japanese investors have been sending money abroad because yields there were higher. If those outflows slow, he said, that is "in many ways more important than what the policy is."

Then he made the call. Europe looks weak. The UK "has its own economic and political problems." Switzerland "has the lowest yields ... on the planet right now." So if the yen has stopped falling, the European currencies are the ones most at risk against it:

"European currencies against the yen, which has been so, so dramatic over a period of years, you know, even if it's reversed a quarter, that would be a massive move."

Why Japan is buying fewer US bonds. Harley Bassman, the veteran rates trader known as "The Convexity Maven," explained the mechanics on Alpha Exchange: "Harley Bassman, The Convexity Maven" (Oct 6). When Japanese rates were near zero and US rates were 3–4%, Japanese life insurers and households had every reason to buy US bonds. Now the gap, after the cost of protecting against currency moves, "has compressed significantly":

"That doesn't exist anymore. And the currency has gotten annihilated."

His conclusion: "I just see less buying out of foreigners for US dollars."

Where dollar-yen is now. Hardy said on Wednesday that USD/JPY is "still at 158 plus," off the highs, and testing its 200-day moving average at 158.50. He called that a "really critical resistance area." (A 200-day moving average is the average price over the past 200 trading days; traders watch it as a line in the sand.)

His view: if short-term US yields keep falling and long-term yields stay calm, "looking for room for the Japanese yen to rally here."

Hardy also dismissed one scare. Japan's giant public pension fund, the GPIF, did not discuss its asset mix at its September meeting. Some read that as bad for the yen, because it suggests no big move to bring money home. But the fund discussed it in an unusually timed August meeting. "Nothing burger is the risk for that particular news item," he said.

A note on the US intervention. On The Jack Mallers Show: "Europe Is Screwed" (Oct 6), Jack Mallers, CEO of the Bitcoin payments firm Strike, went back over this summer's US move to buy yen. He described the US selling euros from its Exchange Stabilization Fund to buy $5–10 billion of yen, the first US purchase of yen to support Japan's currency since 1998. His theory is that Washington wants Japan to sell European assets rather than US ones. That is one commentator's speculation, not a stated policy. But it's a reminder that the US chose to fund its yen support by selling euros.

Why it matters for a book: The State Street view from last week (Street Signals, Oct 1: 165 as the top for USD/JPY, below 150 by year-end) now has company. If you agree the yen has bottomed, Englander's point is that the bigger payoff may be in EUR/JPY and CHF/JPY, not USD/JPY. That's where years of one-way moves have built up.

4. Sterling: beating the euro, with a Budget to come

Sterling is quietly having a good run against the euro.

On Saxo (Oct 7), Hardy said EUR/GBP "just did tick below that 84.55 level from back in July," making it "the lowest level since early 2025." He added: "really not much on the chart there in the way of support." He called the trend "pretty well entrenched" and noted that EUR/GBP "does tend to move in very impulsive fashion."

That fits J.P. Morgan's view from last week: talk of a closer UK-EU relationship is chipping away at the "Brexit discount" in the pound.

But the UK has its own test coming. The Budget is on October 28. On The Rest Is Money: "How should the Chancellor fill his hole?" (Oct 4), Robert Peston put the gap at somewhere between £10 billion and £15 billion, and possibly as much as £20 billion, because "interest rates have moved against him" and some defence spending is unfunded.

Tax lawyer Dan Neidle of Tax Policy Associates said the government boxed itself in by promising not to raise income tax, National Insurance, VAT or corporation tax. "If you take a list of all the taxes in the UK ... and you cross out the ones he promised not to raise, you're not left with much." Among his options:

• Reform capital gains tax, matching it to the dividend rate (39.35%) but with an allowance for inflation. Neidle said serious research suggests this could raise "somewhere over 12 billion." But it would need an exit tax to stop people leaving first, and he isn't confident it would raise the money this late in the parliament.

• Freeze tax thresholds for another year, raising about £5 billion from 2031. Neidle called this an "absolute certainty."

• Close the stamp duty loophole on commercial property sold inside companies, worth "somewhere north of a billion every year."

The view from a former Bank of England insider. Andy Haldane, the Bank of England's former chief economist and now head of the British Chambers of Commerce, spoke to CNBC on Squawk Box Europe Express (Oct 6). He was blunt about where the UK stands:

"We are a leveraged bet on the world economy. Our inflation is higher and stickier. Our growth is lower and stickier. We have yet to balance the books this century ... That's why the ice is thin, and that's why you need to skate carefully."

But he also sees an upside. If the Budget takes real action on welfare or wider public spending, he said, it "would deliver a very pleasant surprise in terms of 25, 50 basis points off borrowing costs."

Why it matters for a book: Sterling is beating the euro because France and Spain look worse, not because the UK looks great. The October 28 Budget is the big two-way risk. A credible spending plan could take 25–50bp off gilt yields (Haldane), which would help the pound. A messy one would put sterling's twin-deficit problem back in focus.

5. The dollar: strong, but not over-loved

The dollar index (DXY) was at 102.23 on Wednesday, CNBC's Morning Call said (Morning Call, Oct 7). That's near the 102.85 level Marc Chandler flagged last week as a likely top (The KE Report, Oct 2).

On Bank of America's Global Research Unlocked: "Post NFP Takeaways: Econ, Rates, FX" (Oct 5), the bank's FX strategist Alex said the dollar has been in "nonstop rally mode" since the Fed's September meeting. The weak US jobs report (29,000 jobs added versus 90,000 expected, plus a 60,000 downward revision, per Saxo) moved the dollar by less than a quarter of a percent.

He gave two reasons for the dollar's strength: the US economy is still resilient with "uncomfortably high inflation," and "more recently, just the France story."

Is everyone already long the dollar? Not yet, Bank of America says. In the futures market, investors went from "multi-year longs in July to slightly short just a few weeks ago," then started rebuilding. And the dollar is still moving in step with interest-rate gaps, not running ahead of them:

"I tend to think that when sentiment is really getting strong, it's when the dollar's outpacing the move in rate differentials. The last time we saw that was right after the war started."

The next big event: The US inflation report for September, due Wednesday, October 14. "If we get a hot report, I think today's labor report would, you know, quickly fade from our consciousness," Alex said. Markets cut the odds of a Fed rate hike this month from 64% to 20% after the jobs data, CNBC said, though a December hike is still in play.

On Bloomberg Surveillance (Oct 6), one speaker offered a sensible caution: "The dollar goes up half a percent every day. We expect it to go up forever. ... A pause is very reasonable, but it doesn't mean it's the end of the rally."

Why it matters for a book: The dollar's rally is mostly a euro story plus a US-rates story. If US inflation comes in soft next week, the rates support weakens. But the euro story doesn't go away, so EUR/USD may lag any broader dollar pullback.

6. The franc: still the cheapest money on the planet

Englander's point about Switzerland is worth pausing on. The country has "the lowest yields ... on the planet right now," he said. That is why the franc keeps getting used as a currency to borrow in, even after last Thursday's five-sigma drop in EUR/CHF. It is also why it keeps snapping back as Europe's safe haven every time French spreads blow out. Borrowing francs is cheap until the day it suddenly isn't.

The debate

The bear case for the euro is crowded but well-argued. Deutsche's Tarman wants to sell every euro rally, even one sparked by ECB help, and sees 1.09 before 1.15. Bank of America gives a clear rule linking French spreads to the euro. Market Maker's Curran thinks France needs a real crisis before it can fix itself, with an election in April and May. Spain has added a new political risk.

The case against piling in. The Le Pen episode showed how fast French spreads can snap tighter: 30bp in a day. J.P. Morgan argued last week (At Any Rate, Oct 2) that France's spread is "more than 40 basis points too wide" on fundamentals and that forced selling of leveraged positions drove much of the move. Englander also warned on Bloomberg Surveillance that "people got tired of selling. But they'll come back," which cuts both ways: the selling is tired, but the reasons haven't gone away.

On the yen, the podcasts lean one way. Englander, Hardy, Bassman and last week's State Street view all point toward a yen that stops falling, with Japanese money staying home. Nobody this week made a strong case for USD/JPY breaking much above 160. The main risk to that view is a hot US inflation report next week, which would push US yields up again.

On sterling, there is a real two-way debate: but it runs through the Budget. Haldane sees a possible 25–50bp rally in gilts on credible cuts. The Rest Is Money panel thinks the Chancellor has few good options and may end up "scrabbling around" for small changes again.

Trades in play

• Short EUR/USD, selling rallies. Deutsche's Tarman is explicit: short euro, target 1.09 before 1.15, use squeezes (even ECB-driven ones) to add. The Bank of America 10bp-to-0.5% rule gives a way to link the position to French spreads.

• Short EUR/GBP. Hardy says the break below 0.8455 leaves "not much on the chart" for support. This is a way to be short the euro without betting on the dollar: though it carries Budget risk on October 28.

• Short European currencies against the yen. Englander's point: if the yen has stopped falling, EUR/JPY and other European crosses have the most room to unwind after years of one-way moves. Japanese selling of French bonds (Bloomberg, via Saxo) would add to it.

• Watch USD/JPY at 158.50. Hardy calls the 200-day average "really critical resistance." A soft US inflation report on October 14 is the obvious trigger for a move lower.

Read-throughs

• EUR/JPY. The cleanest overlap of this week's two main themes: European political stress and a yen that may have bottomed. Hardy said EUR/JPY was "under pressure" on Wednesday.

• EUR/CHF. Still sensitive to French spreads after last week's shock. With Swiss yields the lowest in the world, the franc stays the European safe haven.

• Bunds and gilts versus Treasuries. US 10- and 30-year yields are at roughly 24-year highs, Hardy said, which he called "a potential aggravator for financial conditions globally." Haldane warned that if US borrowing costs hit "big figure six," the financing of the AI boom "starts to come into question."

• European stocks. French stocks fell for a fourth session out of five on Monday (CNBC). Hardy said European bank stocks had "a very ugly Thursday" last week, down about 3%.

• Oil. Brent was above $101 on Wednesday. Hardy said physical "dated" Brent trades near $125 versus about $102 for December futures, a sign of how tight prompt supply still is. High energy prices are part of why Europe and Japan look weak and the dollar looks strong.

• Spanish bonds. Spain's 10-year yield was steady around 4.09% on Monday despite the snap-election talk (CNBC). Worth watching if Sánchez does call a vote.

What changed

On Monday, the story was the franc's five-sigma day and J.P. Morgan's idea of using the euro, not the franc, to fund carry trades.

This week the euro's problems spread beyond France. Spain joined the list, and the euro hit a 17-month low. Le Pen's budget plan showed how fast French spreads can swing: 30bp tighter and then 10bp wider in two days.

Two new ideas stand out. First, Bank of America's rule of thumb that 10bp of French spread is worth about 0.5% on EUR/USD. Second, Standard Chartered's call that the real yen trade is against Europe, not the dollar.

EUR/GBP also broke below 0.8455, its lowest since early 2025.