On Friday (October 30), the euro was trading at around 1.1177 against the US dollar. The distance between the August high of 1.1711 and the October low of 1.1104 on the chart outlines the downward slope over the past two months. The first layer of narrative surrounding yesterday's ECB meeting was a hawkish shift: the statement initially leaned dovish, but Lagarde stated at the press conference that interest rate hikes were discussed and hinted that the policy direction remained towards further tightening. Hours later, media reports indicated that officials were "prepared" for a rate hike in December. The second layer of narrative has not been fully discussed by the market—the leadership uncertainty resulting from Lagarde's early departure is intertwined with French fiscal pressures, forming a separate thread in the euro's medium-term pricing.

Fundamentals: GDP, French Finances, and the Succession Struggle

Today, the Eurozone's Q3 GDP is expected to grow by 0.3% quarter-on-quarter, slightly higher than the consensus; France's forecast is 0%, and a negative growth could trigger a widening of interest rate differentials. France's problems extend beyond a single quarter's GDP. The French government is struggling to pass its budget, urban unrest highlights political challenges, and government bond yields have issued warnings. Market scrutiny of the public finances of key Eurozone member states is becoming more concentrated than ever before. Lagarde has hinted at an early departure, and working assumptions within the Eurozone are increasingly focused on January; this week's decision may be her penultimate meeting. The successor's policy orientation directly impacts the forward pricing of the euro. Former Spanish central bank governor Decos and former Dutch central bank governor Noether are the two most favored candidates in economists' surveys, with Decos at 26% and Noether at 24%. Noether, initially considered a hawk, has softened his stance during his tenure, recently writing that he has transformed from a "skeptic into a principled pragmatist" and is accepting new tools, including transmission protection instruments. Decos was described by the head of fixed income at UFIDA as a candidate with "the strongest technical understanding of monetary policy and central bank operations," and the appointment of such a technocrat signals that "the euro will continue to remain a strong currency." ING previously warned that if the dovish Decos were appointed, it could pose a downside risk to the euro. In other words, the expectation of a December rate hike by the ECB supports the euro in the short term, but who succeeds Lagarde will determine the policy response function in 2027. ING's judgment that EUR/USD will return to 1.120-1.1250 is based on the risk of medium-term dollar positions, rather than a comprehensive strengthening of the euro's fundamentals. Technical analysis is for reference only: the 1.1100-1.1150 range on the chart represents the previous low, and the 1.1200-1.1250 range corresponds to a dense area of short- and medium-term moving averages, which are still in a bearish alignment.

Future Trend Outlook

Hawkish communication from the ECB has provided a window for the euro to recover, but the French fiscal and leadership transition factors have limited the sustainability of this recovery. Whether EUR/USD can hold above 1.1200 depends on the extent of GDP realization, French growth data, and the pace of adjustments to dollar holdings.

Further Reading

Q: Are the ECB's hawkish signals credible? A: Lagarde clearly stated that interest rate hikes were discussed, and the media hinted at "preparing" for action in December, but the wording regarding financial conditions in the statement still left room for maneuver. Q: Why is French GDP crucial? A: If France records negative growth, it could lead to a widening of French government bond spreads, directly weakening the foundation for the euro's recovery. Q: How will Lagarde's successor affect the euro? A: Nott is hawkish but his stance has softened; Decos has high technical reputation but is considered dovish by ING. Differences in the candidates will affect the long-term policy path. Q: How will the US election result transmit to the euro? A: Net long positions in the US dollar may provide short-term support for the euro, but after the election, the euro will return to its own logic based on the ECB and French fiscal policy.