Euro Drops to 17-Month Low Against Dollar, Eurozone Bond Yields Fall After ECB Holds Rates

By Renae Dyer and Emese Bartha

The euro dropped to a 17-month low against the dollar and eurozone government bond yields fell on Thursday after the European Central Bank kept interest rates steady and refrained from sending strong signals about possible future rate increases.

The decision was partly overshadowed by an earlier announcement that ECB President Christine Lagarde would step down early, in spring 2027. It also followed a recent jump in French government bond yields and a sharp widening of their spreads versus German peers due to budget concerns.

In its policy statement, the ECB said financing conditions have tightened since the last meeting which was likely to weigh on inflation and growth. The central bank also warned that higher energy prices could hit growth and drive up inflation, although underlying prices remained broadly stable and wages were yet to show a material response.

The euro dropped to $1.1103, the lowest level since May 2025, according to LSEG data. The euro also reached a near 19-month low against sterling at 0.8347 pounds.

The 10-year German Bund yield declined 4.8 basis points on the day to 3.336% after the decision, down from 3.355% beforehand. The French 10-year OAT yield slid around 10 basis points after the announcement to a low of 4.833%, from 4.880% previously, according to Tradeweb data.

"The ECB ultimately opted to keep rates on hold, seeking to avoid upsetting euro rates markets, as the rapid widening of [French government bond] OAT spreads has already caused enough upheaval," said Robeco strategist Rikkert Scholten in a note.

Speaking in a press conference after the decision, Lagarde said the ECB did consider whether a rate hike was appropriate but due to uncertainty over various things and relatively stable underlying inflation it unanimously decided to hold.

The ECB's decision to hold rates reflects an increasingly tough task of balancing the risks of tightening monetary policy too aggressively and allowing inflationary pressures to become entrenched, MHA economic adviser Joe Nellis said in a note.

Still, analysts expect further rate increases to come after one hike in September. Money markets priced nearly three quarter-point rate increases over the coming year, LSEG data showed.

The ECB reiterated its resolve to bring inflation back to its medium term target of 2%, and also repeated that it was prepared to use its Transmission Protection Instrument to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all eurozone countries.

The spread between 10-year French and German government-bond yields reached its widest since late 2011 at 177 basis points on October 22, according to LSEG.

"On France, the fiscal and political risks are likely to keep speculation high around a potential ECB intervention at some stage," said Christian Hantel, portfolio manager at Vontobel. "Hence, the ECB will closely monitor spillover effects to other sovereigns, bank funding and overall financial conditions."

The ECB warned that inflation risks are rising, yet it cannot sound too hawkish without worsening already fragile sovereign borrowing costs, said Naeem Aslam, CIO at Zaye Capital Markets.

"That turns the euro into a currency carrying both an energy-inflation premium and a policy-credibility discount."

Lagarde's decision to step down early means her term will finish before the French presidential elections in spring 2027.

"Lagarde's resignation is the bigger story than today's widely expected decision to leave rates on hold," said Felix Feather, economist at Aberdeen Investments.

"We don't expect the change at the top to alter the near-term rate outlook, but markets will be watching the succession closely as pressure on French government debt persists, as different candidates have different attitudes to non-standard policy tools such as the transmission protection instrument," he said.

Write to Renae Dyer at renae.dyer@wsj.com and Emese Bartha at emese.bartha@wsj.com

(END) Dow Jones Newswires

October 29, 2026 11:17 ET (15:17 GMT)