Euro Slides to 1.1459 as French Bond Spreads Widen Past 100 Bps
EUR/USD hits range lows while French-German 10-year yield spreads exceed 100 bps, offsetting ECB rate hike expectations.
Key points
- EUR/USD trades near 1.1459, close to the bottom of its 1.1400-1.1800 annual range.
- French-German 10-year bond yield spreads have widened above 100 basis points this month.
- Markets expect three to four more ECB rate hikes, with over 50% odds for October.
The euro fell to 1.1459 against the US dollar this week. This move places the currency pair near the bottom of its 1.1400 to 1.1800 trading range. The decline occurred despite market expectations for continued European Central Bank tightening. FXStreet analysts note that French fiscal risks are currently outweighing the positive impact of monetary policy. The pressure on the euro reflects a shift in market sentiment regarding sovereign debt sustainability.
Traders now expect the ECB to implement three or four additional rate hikes this year. There is a greater than 50 percent probability of another increase in October. ECB Chief Economist Philip Lane cited a second wave of energy price rises as the primary driver. He warned that higher gas and oil costs will push up food and goods prices. This inflationary pressure is expected to persist until mid-2027, according to his latest commentary.
French Debt Spreads Widen Significantly
The yield spread between French and German 10-year government bonds widened above 100 basis points. This expansion represents a significant increase in borrowing costs for Paris. Scope Ratings downgraded France citing a sustained deterioration in the fiscal outlook. The agency pointed to rising general government debt and persistently high deficits. These structural issues are limiting progress on necessary economic reforms.
ECB Tightening Offsets Dollar Strength
Hawkish repricing of Federal Reserve rate expectations initially pressured the dollar. However, the extended ECB tightening cycle is helping to offset this effect. The euro-zone economy is expected to grow at a steady but moderate pace. This growth assumes that the current energy price shock does not intensify further. The balance between US and EU monetary policies remains a key driver for currency volatility.
Limited Spillover Impact On Currency
Building fiscal and political risks in Europe remain in focus for investors. So far, there has been limited negative spillover impact on the euro itself. Bigger moves have occurred in the sovereign bond markets rather than the currency. The market is currently pricing in higher risks for French debt specifically. This distinction suggests that the euro may remain resilient despite regional fiscal challenges.
