ING: The EUR

The euro started the week at the bottom of the G10 scorecard, a clear signal that turbulence in the French bond market remains firmly on FX investors' radars. The euro is being affected through two channels: a direct one, where a fiscal risk premium (so far not extreme) has been added, and an indirect one via a repricing lower in ECB rate expectations. Pricing for the March ECB meeting has declined from 80bp on 24 September to 45bp now. This has been a very EUR-specific move and has pushed the EUR:USD two-year swap rate differential (ESTR-SOFR) to -167bp. The last time the spread was at these levels was in August 2025. At that point, EUR/USD was trading around 1.16-1.17, but that reflected a sizeable USD- specific risk premium after Liberation Day and a sharp rise in USD hedging demand. Before Liberation Day, a swap spread at current levels was consistent with EUR/USD closer to 1.08. Some relief in French bonds yesterday helped EUR/USD recover to just above 1.120 after a fall to 1.1160, but we don’t have much confidence in a sustained rebound. The fiscal risk premium is still relatively limited, leaving scope for EUR/USD to test 1.110 or even 1.100 if bond market stress intensifies