EUR/USD breaks below 1.12 to a 16-month low: Spain's election talk, French bonds and a dollar on a four-week winning run

The euro has slipped to levels not seen since the middle of 2025. During the Asian session on 5 October, EUR/USD traded as low as 1.1161, breaking below 1.12 to a new 16-month low, according to DailyForex. The move came as reports suggested Spain may hold an early election and as concern over European fiscal risks, including stress in French government bonds, weighed on the single currency. By the end of the week the dollar was heading for a fourth straight weekly gain, as the euro slumped on fiscal worries, according to Investing.com.

For traders, the break below 1.12 matters because the pair had held above that level for months. A clean move through a well-watched level often draws in trend-following money and forces holders of long euro positions to reassess. With US inflation data due on 14 October and the European Central Bank's next decisions approaching, the coming weeks will test whether this is the start of a deeper decline or an overshoot.

Why the euro is falling

The immediate trigger is political risk. Reports that Spain may call an early election raised questions about fiscal policy in the eurozone's fourth-largest economy, at a time when markets were already focused on France. French government bonds have been under pressure as investors worry about budget deficits and the government's ability to pass fiscal measures.

When investors demand higher yields to hold a country's debt, it can signal concern about that country's finances and, by extension, the cohesion of the currency union. Rising spreads between French or Spanish bonds and German bunds are often accompanied by euro weakness, as international investors reduce exposure to the region as a whole.

The second driver is the dollar's own strength. The Federal Reserve raised rates in September for the first time in three years, and while a weak September jobs report reduced the odds of an October hike, US yields remain attractive relative to Europe. A widening interest rate gap tends to favour the dollar.

Positioning amplifies the move. When many traders hold the same view, a break of a key level can trigger stop-loss orders and forced selling, pushing the price further than fundamentals alone would justify. That is one reason currency moves often overshoot in both directions, and why traders watch positioning data alongside economic news.

The dollar's four-week run

The dollar's rally has been broad. USD/JPY traded near 158 in early October, and the dollar recovered against most major currencies even after September payrolls showed only 29,000 jobs added, well below consensus of roughly 84,000 to 90,000. Prior months were revised down by a combined 60,000, and the unemployment rate rose to 4.2 percent.

That the dollar held up after weak jobs data says something about market psychology. Investors appear to see the Fed as more likely to keep rates elevated than the ECB, and they see the US economy as more resilient than Europe's despite softer hiring. Safe-haven demand linked to Middle East tension and oil prices around 100 dollars a barrel has also supported the dollar.

Not every currency has been equally weak. Sterling faces its own test ahead of the UK Budget on 28 October, with Morgan Stanley positioned against the pound on the view that markets price in too little fiscal risk. Emerging market currencies, including those in Southeast Asia, have felt pressure from the stronger dollar and higher US yields.

A clean break of 1.12 turns a slow euro grind into a trend trade. CPI on 14 October decides whether that trend has legs.

The yen is a particular case. With USD/JPY near 158, Japanese officials have repeatedly warned against excessive currency moves, and markets remain alert to the possibility of intervention. Any intervention would weaken the dollar broadly for a time, which could also lift the euro, adding another source of two-way risk for traders.

Levels and events traders are watching

• 1.12: the level the euro broke on 5 October, now likely resistance on any rebound.
• 1.1161: the 16-month low recorded during the Asian session on 5 October.
• 14 October, 8:30 a.m. ET: US September CPI, with headline seen at 3.6 percent and core at 2.5 percent year on year.
• 15 October: US producer prices, retail sales and UK GDP.
• 28 October: UK Budget, a risk event for sterling and cross rates such as EUR/GBP.

Technical analysts noted that EUR/USD has tended to trend reliably, which is part of why the break below 1.12 drew attention. Trend-following strategies often add to positions after such breaks, which can extend moves. But trends also reverse sharply when the fundamental story changes, and a soft US inflation reading could trigger a rebound as short euro positions are covered.

For broader context on how the September Fed decision reshaped currency markets, see our analysis of the Fed hike and Asian currency repricing, and our CPI preview for the scenarios around Wednesday's data.

What could turn the euro around

Three developments could reverse the slide. The first is US data. A soft core CPI reading would lower expectations of further Fed hikes, push US yields down and weaken the dollar broadly. Given how far the euro has fallen, it would likely be among the main beneficiaries.

The second is European politics. Clarity on Spain's election timing and fiscal plans, or progress in France on budget measures, would ease the pressure on bond spreads. Political risk premiums can disappear as quickly as they appear when uncertainty is resolved.

The third is the ECB. Policymakers have hiked rates this cycle to contain inflation, and any signal that they will respond to currency weakness or maintain a firm stance would support the euro. Conversely, signs that growth worries are making the ECB more cautious would add to downward pressure. We covered the ECB's last decision in our report on the eve of its September hike.

Oil prices could matter too. Europe imports most of its energy, so high oil prices worsen its trade balance and weigh on growth, both negatives for the euro. Easing oil prices, such as the move after the planned G7 release of strategic reserves in early October, would remove some of that pressure.

What it means for Asian traders and businesses

For traders in Asia, EUR/USD's moves matter beyond the pair itself. A stronger dollar tends to weigh on Asian currencies, and the euro's slide is part of a broad dollar rally that has also pushed the yen toward 158. Traders in the region should watch the dollar index as a whole rather than any single pair.

For businesses, a weaker euro changes the economics of trade with Europe. Asian exporters selling to European customers may find their goods more expensive in euro terms, while importers of European goods benefit. Companies with euro revenues or costs should review hedging, particularly ahead of high-impact data.

For retail traders, the usual risk rules apply. Major data releases bring wide spreads and fast moves, and leverage magnifies both gains and losses. Brokers often adjust margin requirements around big events, so checking trading conditions in advance is worthwhile.

The bigger picture for the euro

The euro's weakness is a reminder that currency markets price politics as well as interest rates. The eurozone's fiscal rules, the cohesion of its members and the credibility of national budgets all feed into the currency's value, and periods of political uncertainty tend to produce sharp moves.

At the same time, the dollar's strength reflects a US economy that markets still see as relatively robust and a Fed that has started tightening again. The balance between those two forces will decide whether 1.12 becomes a ceiling or a floor in the months ahead.

The euro's break below 1.12 reflects a combination of European fiscal politics and a resilient dollar backed by a Fed that has resumed hiking. Whether the slide continues depends on Wednesday's US inflation data, the political path in Spain and France, and how the ECB responds. For traders and businesses with euro exposure, the coming weeks call for careful risk management around high-impact events rather than bets on a single outcome.