ING: The EUR
EUR/USD broke to new yearly lows as the sell-off in French government bonds intensified, raising broader concerns about the Eurozone’s fiscal and monetary outlook. With little prospect of near-term fiscal consolidation, French debt remains vulnerable, while the deterioration in bond markets raises questions over whether the ECB can deliver another 75bp of tightening. Contagion into other peripheral markets such as Italy and Spain is an additional concern, as any ECB response could involve less tightening or, in a more severe scenario, intervention through its Transmission Protection Instrument, both of which would weigh on the euro’s rate appeal. The deterioration in bond markets and the break of technical support have shifted the near-term EUR/USD bias lower, with the market potentially demanding a further risk premium if the French sell-off continues. Upside corrections are therefore expected to remain relatively limited. The repricing of ECB rate expectations is also supporting the Swiss franc, with higher volatility and lower European interest rates adding to demand for the currency. If lower ECB rate expectations become the dominant market narrative, EUR/CHF could move back to
EUR/USD broke to new yearly lows as the sell-off in French government bonds intensified, raising broader concerns about the Eurozone’s fiscal and monetary outlook. With little prospect of near-term fiscal consolidation, French debt remains vulnerable, while the deterioration in bond markets raises questions over whether the ECB can deliver another 75bp of tightening. Contagion into other peripheral markets such as Italy and Spain is an additional concern, as any ECB response could involve less tightening or, in a more severe scenario, intervention through its Transmission Protection Instrument, both of which would weigh on the euro’s rate appeal.
The deterioration in bond markets and the break of technical support have shifted the near-term EUR/USD bias lower, with the market potentially demanding a further risk premium if the French sell-off continues. Upside corrections are therefore expected to remain relatively limited. The repricing of ECB rate expectations is also supporting the Swiss franc, with higher volatility and lower European interest rates adding to demand for the currency. 9250 area.
More broadly, the key issue for the euro is whether weakness in French debt remains contained or spreads further across European government bond markets, potentially forcing a significant reassessment of the ECB’s tightening path.