1.1204, a 17-Month Low (5 October 2026): Why the Euro Is Falling on Spain's Snap Election and France's Spread — and What It Means for EUR/USD

The euro fell to its lowest level against the dollar since May 2025 on Monday 5 October: the ECB's reference rate was fixed at 1.1204, down 3.8% from 1.1652 on 9 September. The trigger was Spain's prime minister calling a snap election for 29 November, landing on a week in which the French-German 10-year spread briefly rose above 150 basis points. What makes the move unusual is what it ignored — euro-area inflation at 3.8% and a soft US jobs report should both have supported the euro. A political risk premium has taken over from the rate gap as the thing setting the price.

What happened on 5 October

The sequence matters, because the euro did not fall on one headline. It fell as the latest step in a slide that began in mid-September.

On Friday 2 October the Spanish Congress rejected two housing decrees from the government, including measures on evictions and temporary lettings. On Monday morning Prime Minister Pedro Sánchez announced a general election for 29 November, saying he was seeking a broader majority in parliament (Al Jazeera). His coalition, formed in November 2023, has depended on a range of smaller parties and has not passed a new budget in three years.

The currency reaction came against a background that was already fragile. In the week before, France's 10-year bond yield had briefly risen more than 150 basis points above Germany's, as Semafor reported. And the French government's draft outline for 2027, which aims to cut the deficit from 5.4% of GDP to 5%, was greeted with scepticism: Barclays economists said France was unlikely to meet its targets even if the plan passed, according to CNBC, and ING said the budget would "not resolve France's structural fiscal problems."

By the ECB's 14:15 CET fix on Monday, EUR/USD stood at 1.1204. Bloomberg described it as a 17-month low driven by the region's fiscal and political risks.

The euro fell against everything, not just the dollar

The quickest test of whether a EUR/USD move is about the euro or about the dollar is to look at the euro's other crosses. If the dollar were simply rallying, the euro would be roughly flat against the pound or the yen. It was not.

Source: ECB euro reference exchange rates.

The moves are close in size against the dollar, pound, franc and yen. That is the signature of a currency being repriced on its own fundamentals. The franc line is worth singling out: EUR/CHF dropped from 0.9437 to 0.9279 in a single fix on 2 October, which is the classic sign of money looking for a safe place inside Europe rather than leaving for the US.

Why a bond spread can move a currency

The French-German spread is a gap between two euro-denominated yields, so it says nothing directly about exchange rates. It reaches the euro through three channels.

Portfolio flows. Foreign investors — reserve managers, pension funds, insurers — hold euro-area government debt as a block. When one large member's debt starts to behave like a credit risk rather than a rates instrument, the simplest way to reduce exposure is to sell bonds and currency together, or to hedge the currency more heavily. Either way, the result is euro selling that has nothing to do with the ECB's policy rate.

A constrained central bank. The ECB raised its deposit rate to 2.50% on 10 September. Inflation then came in at 3.8% for September, with energy at 18.8% (Eurostat). On inflation alone, that strengthens the case for further tightening. But every increase also lifts borrowing costs for the most indebted members. The ECB has a tool designed for this — the Transmission Protection Instrument, created in July 2022 to counter "unwarranted, disorderly market dynamics" — but its eligibility criteria include compliance with the EU fiscal framework. The less certain that compliance looks, the less markets can count on the backstop.

The missing single treasury. The dollar is backed by one fiscal authority. The euro is shared by 21 governments with separate budgets and separate elections. Most of the time that does not matter. When two of the four largest members face political uncertainty at once, it becomes the main thing the currency is priced on.

Why 3.8% inflation and a weak US jobs report did not help

On a normal rates read, 2 October should have been a good day for the euro. Eurostat's flash showed inflation at 3.8% against forecasts of 3.5–3.7%, with services up to 3.2% from 3.0% — the domestic component the ECB watches for second-round effects. Hours later, US payrolls rose just 29,000, the kind of number that reduces the odds of another Fed increase. Higher odds of ECB tightening, lower odds of Fed tightening: the rate gap moves in the euro's favour.

The ECB's fix that day fell 0.65%, from 1.1298 to 1.1225.

Two things explain the mismatch. First, the inflation is mostly energy, and for a large net energy importer, energy-driven inflation is a loss of income before it is a reason to hike — the commodity channel works against the euro even as the rate channel works for it. We set out that tension in the September flash CPI preview. Second, US long-term yields kept rising regardless: Treasury's par curve put the 10-year at 5.28% on 2 October, as covered in our Fed minutes preview. A higher US long end keeps the dollar's carry advantage intact even when the Fed's next move looks further away.

Spain is not France — but the timing stacks

It would be a mistake to read Spain as another France. Spain has been one of the euro area's growth bright spots, and investors have tended to see its public finances as relatively steady. Rufaro Chiriseri of RBC Wealth Management told CNBC that in the previous week's bond sell-off Spanish and Portuguese debt "didn't sell off as aggressively as we saw in France, in Italy."

The point for the euro is not that Spain is in trouble. It is that the bloc's political calendar has filled up. Spain votes on 29 November. France's budget must pass in the coming months, ahead of a 2027 presidential election, and ING noted that none of the main candidates has yet set out a detailed plan for stabilising the debt ratio. Markets price uncertainty, not outcomes, and two large members with open political questions at the same time is the kind of risk a shared currency without a shared treasury has to absorb.

What would change the picture

None of the following is a forecast. They are the events that would tell you which way the risk premium is moving.

• France's 2027 budget. Passage of a credible plan would be the most direct way for the OAT-Bund spread to narrow. A failure, or a deficit path drifting higher, would be the opposite signal.
• Fed minutes, 7 October, 2:00 p.m. ET. If the minutes show the committee less inclined to tighten than priced, the dollar side of EUR/USD softens — though the 2 October reaction suggests that may not be enough on its own.
• ECB, 29 October. The first meeting where the Governing Council has to weigh 3.8% inflation against wider spreads in public. How it talks about fragmentation matters as much as the rate decision.
• Spanish polling and campaign platforms into 29 November, read for fiscal commitments rather than for who is ahead.
• EUR/CHF. The franc cross is the cleanest real-time gauge of European stress, because it strips out the US. A stabilising EUR/CHF would suggest the safe-haven bid is fading.

To see how the risk-sentiment and interest-rate factors are scoring the euro, the dollar and the Swiss franc right now, check the USD page alongside the euro. For background on how leadership questions at the ECB feed into the currency, see our earlier piece on Lagarde's possible early exit and French politics.

To learn how Pip Theory builds its fundamental currency-strength scores, see the methodology overview.

Educational macro context only — not investment advice.