Euro Under Pressure: French Spread Lifts EUR/USD Risk
EUR/USD slips below 1.1200 as French unrest widens the Bund spread to 145 bps. What it means for the ECB, the budget vote and momentum.
Euro Under Pressure: French Spread Nears 150 Basis Points
Key Takeaways
- EUR/USD slips below 1.1200 at times on Monday and trades around 1.1230.
- Unrest in France widens the yield gap to Bunds to roughly 145 basis points.
- Tomorrow, a vote in Paris tests whether fiscal consolidation remains politically viable.
The euro starts the week on the back foot. EUR/USD dips below the 1.1200 mark at times and stands near 1.1220 to 1.1230 US dollars at midday, down about 0.2 percent. The trigger is the weekend rioting in France, which adds to the strain on President Emmanuel Macron's already fragile budget course.
Paris Becomes a Risk Factor for the Euro
According to Justin Low at investingLive, the yield premium of French government bonds over German 10-year Bunds is widening again toward 145 basis points. That puts the 150 basis point mark within reach. In early September the gap was still around 85 basis points. The spread is a gauge of how much extra investors demand for French debt risk.
Behind the pressure is a familiar pattern: a large budget deficit, a fragmented parliament and unpopular spending cuts that are hard to push through while people are in the streets. Low warns that a break of the 150 level could mean a rough ride for the euro into late October. On October 23, Moody's is also scheduled to review France's credit rating.
The market has already translated this into rate expectations. According to Giuseppe Dellamotta of investingLive, bets on an ECB rate hike in October have dropped markedly after the stress in the bond market. For December, the market still prices an increase at about 87 percent, plus two further hikes next year, with cuts only in 2028. By his account, the spread reached its highest level since the European debt crisis.
Why Inflation Puts the ECB in a Bind
The central bank has already hiked twice this summer, and the data offers little relief. French inflation rose to 3.1 percent in September (CPI, final estimate) from 2.4 percent in August; the harmonized index HICP climbed from 2.6 to 3.4 percent. Energy prices were up 21.3 percent year over year, and services inflation accelerated to 2.4 percent. Only core inflation stayed below the ECB's 2 percent target, at 1.5 percent.
That is the bind: further hikes would strain already expensive public finances, while waiting risks energy prices feeding more strongly into wages and services. Low therefore sees a December hike as all the more likely if energy costs pass through more broadly.
On the dollar side, the euro gets some relief. Long-dated US yields are falling despite hotter inflation data, and the dollar is giving ground. Expected Fed tightening through the end of 2027 fell from 80 to 70 basis points, according to Dellamotta. The market seems to be asking whether growth is suffering. Friday's flash PMIs for the eurozone and the US are the next test.
What momentum says
Momentum signals a mixed picture for EUR/USD. On the hourly timeframe (1h) the state is bearish, on 4h it is bullish. On the daily (1D) and weekly (1W) timeframes it remains bearish. The broader trend therefore still points down, and the short-term recovery on 4h has not yet turned the higher timeframes. At the time of the snapshot the price was 1.1231.
Scenarios
If EUR/USD falls sustainably below 1.1200, Low sees the October low near 1.1113 coming into focus. Dellamotta names 1.1067 as an area where buyers could step in; below it, the path opens toward 1.08.
If the pair instead climbs above 1.1250, the next resistance sits around 1.1254 and then 1.1341. The 4h zone around 1.1275 has repeatedly rejected the price. A smooth passage of the budget in Paris could support such a recovery, while a rejection or major concessions would more likely weigh on the euro. The vote on the full budget is scheduled for November 17.