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The euro could recover against the pound and dollar if markets scale back the Fed increases they price.
The euro's five-week decline against the pound and the dollar has gone far enough, according to ABN AMRO, which expects the sell-off to stop even as sentiment stays negative in the near term.
The euro fell to 1.1160 against the dollar on Monday, a 17-month low, and the pound-to-euro rate reached 1.1829 on Wednesday, the best rate for euro buyers since June 2025.
"For EUR/USD, sentiment may remain negative in the near term, but we do not expect the sell-off to continue," says Georgette Boele, Senior FX and Oil Strategist at ABN AMRO.
Rate spreads rather than French politics are the Dutch bank's starting point, which explains why the euro has fallen even as hike expectations came down on both sides of the Atlantic.
Expectations for Fed and ECB increases have both fallen since last week on softer US inflation and on lower oil product prices, the latter following the G7's decision on 2 October to release 100 million barrels of crude and diesel from emergency reserves.
The German-US spread became more negative through that repricing, which supported the dollar, and the move showed up in two-year and ten-year nominal yields as well as in the ten-year real yield spread.
Markets price more than three further Fed increases by 2027 against ABN AMRO's forecast of one, and slightly fewer than three ECB increases by September next year against its forecast of two.
"We continue to believe that financial markets are pricing in too many rate increases by the Fed and the ECB," says Boele.
"If market expectations move closer to our forecasts, the adjustment should put more downward pressure on the dollar than on the euro, helping to limit further declines in EUR/USD," says Boele.
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Talk to a specialistEUR/USD: France Is Already in the Price
The fiscal and political layer sits on top of the rate story, and ABN AMRO treats it as largely discounted.
Speculative investors have built net short euro and long dollar positions as spreads moved, with the French-German yield gap widening considerably over the past week and Pedro Sánchez calling a snap Spanish election on 5 October for a 29 November vote.
Boele places the current episode alongside the eurozone crisis of 2011 to 2012, the May 2018 to June 2019 period and the Italian episode running from January to October 2022, each of which combined fiscal and political uncertainty with net short euro positioning and a lower euro-to-dollar rate.
ABN AMRO's rates strategists judge that the current spread already reflects considerable French fiscal and political uncertainty.
"If the situation is not as negative as currently expected, sentiment towards France could improve somewhat and the spread could narrow," says Boele.
The bank had expected the political pressure on the euro to arrive towards the end of this year and in the first quarter of next, and notes it has come sooner than forecast.
EUR/USD and GBP/EUR: The Forecast and What It Needs
ABN AMRO keeps its end-2026 euro-to-dollar forecast at 1.15, which requires a recovery of close to three big figures from Wednesday's 1.1210.
That puts it among the more constructive euro calls on the street, against ING's view that the pair tests 1.110 and possibly 1.100 if French bond stress intensifies.
The two forecasts frame the range for euro buyers, because a euro recovery of that scale would take the pound-to-euro rate out of the 1.18s and back into the 1.17s, where it spent August and September, and with it the best rates currently on offer.
A repricing of Fed expectations is the condition ABN AMRO attaches, which makes US data the trigger rather than anything happening in Paris.
Marine Le Pen's counter-budget is the near-term risk to the call, because a French spread that widens further removes the sentiment improvement the forecast depends on.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
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