The EUR/USD pair maintained positive ground near 1.1215 during early Asian trading hours on Friday, even as concerns about France's fiscal situation weighed on the euro's outlook [1]. The spread between French and German 10-year bond yields experienced its largest weekly jump in decades last week, as traders sold off French bonds in favor of safer German bunds [1]. This market reaction followed the French government's announcement of a €54 billion savings plan last month, aimed at preventing a catastrophic downgrade or sovereign default [1].
Fears regarding France's ability to control its budget deficit and the sharp bond market selloff have heightened worries about a potential sovereign debt crisis in the Eurozone, which could exert additional selling pressure on the euro in the near term [1]. Uto Shinohara, a senior investment strategist at Mesirow Currency Management, noted that the euro remains under pressure, limiting its appeal as an alternative to the US dollar [1].
On the monetary policy front, the FOMC Minutes revealed a divided stance among US policymakers in September, with some advocating for further rate hikes to counter inflation risks, while others were more cautious [1]. The probability of a 25 basis point rate hike at the Fed's upcoming meeting stands at 17.7%, down from about 38% a week ago, according to the CME FedWatch tool, while markets are pricing in an 83% chance of a hike at the December meeting [1].
Strategists at Brown Brothers Harriman highlighted that the ECB's recent 25 basis point rate hike to 2.50% and the forthcoming Account are unlikely to significantly alter the EUR/USD narrative, given the recent surge in bond yields [1]. They noted that above-target Eurozone inflation and a firmer growth outlook provide the ECB with scope for additional hikes, with the swaps curve implying nearly 75 basis points of tightening to 3.25% over the next twelve months [1]. However, they cautioned that stronger US growth and France's worsening budget crisis keep EUR/USD risks skewed to the downside [1].
Additionally, Fed's Waller delivered a hawkish message, emphasizing the need for more rate hikes, which has kept dollar bulls alert [1].
CONCLUSION
Despite holding above 1.1200, the euro faces downside risks due to France's fiscal worries and ongoing bond market volatility. While the ECB has room for further tightening, stronger US growth and the potential for additional Fed hikes continue to favor the dollar over the euro. Market sentiment remains cautious as investors monitor developments in both US and Eurozone monetary policy.