Euro posts modest gains above 1.1200 despite French political unrest, fiscal worries
- EUR/USD edges slightly higher to around 1.1235 in Thursday’s early Asian session.
- Widespread anti-government protests in France and a worsening fiscal outlook could exert some selling pressure on the Euro.
- Markets price in a small chance of a hike next week.
The EUR/USD pair trades with mild gains near 1.1235 during the early Asian trading hours on Thursday. However, the potential upside for the major pair might be limited amid concerns over the political and fiscal outlook in France. European Central Bank (ECB) policymaker Fabio Panetta is set to speak later in the day.
French 10-year borrowing costs climbed above 5% for the first time in 24 years on Wednesday. The yield on the benchmark 10-year bond, known as obligation assimilables du Trésor (OAT), issued by the French Treasury, rose more than 8 basis points (bps) to 5% in the previous session before retreating to 4.99%.
Political concerns and the government’s failure to agree on a much-delayed budget spook the financial markets. This, in turn, could undermine the shared currency in the near term. French President Emmanuel Macron vowed to prevent a repeat of last weekend's riots and looting, as the Yellow Vest movement filed plans for a major Paris march on Saturday that will present the government with its next big test.
"The French debt situation isn't tractable. They do need to go in and make proper adjustments on the fiscal side to get this debt level down to at least show the seriousness around the trajectory," said John Hardy, global head of macro strategy at Saxo in Copenhagen.
Across the pond, Fed funds traders see only a small probability of a Federal Reserve (Fed) rate hike next week, with the next interest rate increase expected in December, according to the CME FedWatch tool. Fed Chairman Kevin Warsh is also unlikely to signal future moves.
Euro holds firm as EUR/USD correlations with energy and bonds fray
Analysts at Societe Generale highlight that EUR/USD price action has been unexpectedly resilient, remarking that “for EUR/USD, it’s curious that cycle highs in nat gas prices and bond jitters have not triggered another leg down in a way that would have occurred prior to October.” They note that “the correlations have broken down over the past two weeks or so,” with the traditional links between the currency pair, energy prices and bond yields no longer behaving as they did earlier in the cycle. According to the bank, this shift “would suggest that most of the bad news is priced in or investors are not committed to putting on new directional trades, playing the ranges instead.”
Warsh flags investment surge and AI risks as Fed keeps options open into year-end
Fed Chair Warsh delivered a moderately constructive but cautious message, with the FXS Speechtracker score of 5.6/10 coming in slightly softer compared to the established baseline of 6.1/10, underscoring a less emphatic tone than usual. The admission of being “over-scarred from the Global Financial Crisis” highlights a persistent risk-averse bias, even as Warsh points to structural growth and an investment surge driven by “good policies” and stresses that upcoming October and December meetings will be the “crystalizing moment” for decisions on output, employment, and inflation. Warsh’s focus on AI as a near-term demand shock with uncertain employment effects, alongside plans for a field hearing and new Fed task forces, signals an institution trying to harness technological gains while guarding against negative tails and financial stability risks.
The FXS Fed Sentiment Index was unchanged, moving 0.00 points to remain at a hawkish 127.51, indicating that despite the slightly softer FXS Speechtracker score, the overall policy stance is still firmly above the neutral 100 line. This combination suggests that markets should read Warsh’s remarks as consistent with a high-bar-for-easing framework, where optimism on investment and AI-driven productivity is tempered by crisis-era scars and a strong focus on price stability and tail risks.
Technical Analysis: Negative outlook of EUR/USD remains intact below the 100-day SMA
In the daily chart, EUR/USD keeps a bearish near-term tone as it holds below the 100-day simple moving average (SMA) and under the Bollinger middle band. Price is consolidating closer to the lower half of the recent volatility envelope, while the Relative Strength Index (14) at about 41 stays below the neutral 50 line, hinting that downside pressure still outweighs any recovery attempts.
On the topside, initial resistance is seen at the Bollinger middle band near 1.1245, with further gains likely meeting supply around the upper Bollinger band at 1.1370, ahead of the more important 100-day SMA at 1.1455. On the downside, the next significant support comes in at the Bollinger lower band near 1.1120, where a clear break would open the door to a continuation of the broader decline.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
