French riots collide with Russia-Ukraine showdown, trader sentiment hit, euro falls.

In early Asian trading on Monday, the euro fell against most Group of Ten (G10) currencies, at one point dropping 0.5% against the dollar to a low of 1.1183, before recovering some of the decline. As of publication, it was trading near 1.1212 dollars. Two events triggered this round of selling almost simultaneously: Ukrainian President Zelensky accused U.S. President Trump of trying to pressure Kyiv into surrendering to Russia; protests in multiple French cities escalated into clashes between police and demonstrators, resulting in the country's worst street violence in years. Europe's accumulating geopolitical pressure is emerging at an already difficult momenthigh energy costs threaten economic growth, and inflation risks remain elevated. If the geopolitical backdrop deteriorates further, the euro will be more vulnerable to continued declines. Over the past month, the euro has been the worst performer among G10 currencies, falling last week to its lowest level since May 2025. Zelensky's "forced surrender" accusation and diesel politics Zelensky made the accusation in an interview. According to an interview on October 18, he said: "I think some steps are being taken aimed at persuading Ukraine to surrender. I'm not saying that is what our partners want to achieve, but that is how it looks." He also proposed a new plan: Ukraine would stop striking Russian refineries in exchange for more "Patriot" air defense missilesexactly what Trump has demanded in order to push down U.S. diesel prices. Trump unilaterally announced a Russia-Ukraine energy ceasefire on October 11, and on October 17 waived expected sanctions on Russian energy; he blamed Ukraine's drone attacks on Russian refineries for disrupting the global diesel market, and said he "doesn't want to do anything that would stupidly push Russia away from the negotiating table." Zelensky said on October 18 that since the energy ceasefire was announced, Russia had carried out 76 attacks on Ukraine's energy and oil and gas facilities, and said "Russia must be pressured for peace to have a chance." For Europe, this is not a distant war: diesel and natural gas prices directly determine the euro area's inflation path, and therefore directly determine the ECB's policy room. France: From street chaos to bond market pricing On October 17, nationwide "cost of living" protests in France turned into clashes in Paris, Marseille, Lyon, Lille and other places. France's Interior Ministry counted about 550,000 participants nationwide (including 110,000 in Paris), while the CGT union said participation reached 800,000; 2,397 people were arrested across France and 997 police officers and gendarmes were injured, 7 of them seriouslywhile the official initial report on the night of the 17th was only about 1,200 arrests and 150 police injuries, with the figures subsequently revised sharply higher. Paris police said 855 people were detained in the capital, a "record number." The extent of the damage was also rare: the city hall in the central city of Limoges, built in 1883, was set on fire, its roof collapsed and about two-thirds of its facade damaged, with the local prefect calling it "a disaster for cultural heritage"; Marseille city hall was stormed by demonstrators; more than ten metro lines of Paris public transport operator RATP were temporarily suspended, and the Louvre restricted visitor numbers. The fuel for the protests is the cost of living. A poll published on October 8 by France's L'ObSoCo research institute and Sciences Po's CEVIPOF center showed that 45% of French respondents listed inflation and purchasing power as their main concern; earlier student protests starting September 17 were triggered by teacher shortages, overcrowded classrooms and dilapidated facilities. What really puts foreign exchange traders on alert is the fiscal clock behind the protests. The French government is pushing the 2027 budgetabout 43 billion euros in spending cuts to bring the deficit down from 5.4% in 2026 to 5.0%but it must get through a divided National Assembly. French public debt has reached 3.60 trillion euros, equivalent to 119.0% of GDP (at the end of the second quarter, according to INSEE); the 10-year French government bond (OAT) yield was 4.79% on October 16, having approached 5% earlier this month, the highest since 2002; the spread between OATs and German bunds widened to about 150 to 160 basis points in early October, the widest since the 2011-2012 euro debt crisis, before narrowing to about 137 basis points on October 16. Moody's currently rates France Aa3 with a negative outlook, and is scheduled to review it on October 23. It is worth noting that two ECB Governing Council members have made themselves clear: Bank of France Governor Moulin said, "There is no need to look to Frankfurt for a solution; the solution is at home"; Bundesbank President Nagel stressed that the ECB's bond market tools are aimed at maintaining price stability and monetary policy transmission, "and have nothing to do with certain spread levels." In other words, French spreads are not something the ECB is preparing to address. High energy costs: the third stone weighing on the euro Euro area HICP rose to 3.8% year on year in September from 3.2% in August, the highest in three years; energy inflation jumped from 14.3% to 18.8%, the main driver of the increase, while core inflation was 2.5% and services inflation 3.2%. The source of the price pressure remains. Dutch TTF natural gas, the European benchmark, was about 73 euros per megawatt-hour in the week of October 7, about 120% higher year on year, after peaking at about 84 euros in September, the highest since December 2022; EU gas storage stood at 71.5% on October 2, compared with 82.6% a year earlier, a noticeably thinner buffer before winter. Brent crude briefly rose to about 105.20 dollars on October 8, with shipping disruptions in the Strait of Hormuz having lasted eight months since the start of the year. The ECB's response has been to raise rates rather than cut them: on September 10 the Governing Council raised rates by 25 basis points, taking the main refinancing rate to 2.65%, the deposit facility rate to 2.50% and the marginal lending rate to 2.90%, effective September 16; ahead of the October 29 meeting, the market priced about an 86% probability of no change. ECB staff projections put headline inflation at 3.0% in 2026 and growth at only 0.9%a combination of above-target inflation and near-stagnant growth, precisely the combination in which the euro finds it hardest to gain support. So far there has been no obvious second-round effect on wages: compensation per employee slowed from 3.5% year on year in the first quarter to 3.3% in the second. What institutions think, and the less pessimistic side Commonwealth Bank of Australia (CBA) strategist Carol Kong's assessment is: "The market may continue to price a risk premium into the euro. EUR/USD could test support at 1.1130 this week, especially if geopolitical tensions push the dollar higher further." Peers land in a similar place but more specifically: ING FX strategist Francesco Pesole believes the French fiscal risk premium is "still relatively limited," and the euro still has room to test 1.110 or even 1.100; Danske Bank has a 12-month target of 1.12. BBVA global markets strategy director Ana Munera summed up the ECB's position as a "clear dilemma": fighting inflation on one hand while avoiding greater pressure on peripheraland now also coresovereign debt on the other. But there is also fuel in the other direction. The euro has already rebounded after falling to a 17-month low of about 1.1100 on October 14, and CFTC data showed speculative euro net shorts of 137,573 contracts on October 13, in the 0th percentile of the 158-week range (Macro Agent Desk)extremely crowded positioning is itself fuel for a squeeze. The more critical variable is energy: the International Energy Agency (IEA) releasing its last 100 million barrels of reserves under its March agreement, and the U.S. potentially easing sanctions on the shadow fleet, could both push Brent back below 100 dollars, thereby easing European inflation and improving the euro area's terms of trade, which TradingNews called "one of the strongest bullish factors for the euro"; the rebound path it laid out is a break of 1.1293 first, then 1.1325 to 1.1350. Europe's geopolitical tensions are eroding the euro at an already fragile moment, and whether it falls further depends on whether the geopolitical backdrop continues to deteriorate. For traders, this means the risk premium will be hard to remove from euro pricing in the short term.