Euro recovers to near 1.1200 on softer US Dollar, eyes on France debt concerns
- EUR/USD rebounds to near 1.1200 in Thursday’s early Asian session.
- Worries about France's fiscal position ahead of the 2027 presidential election undermine the Euro.
- Fed policymakers see another hike coming, minutes showed.
The EUR/USD pair recovers some lost ground to around 1.1200 during the early Asian session on Thursday. However, the potential upside for the major pair might be limited as France's fiscal concerns continued to weigh on the Euro (EUR). Traders await the release of the US weekly Initial Jobless Claims report and the Fedspeak later on Thursday.
French Prime Minister Sébastien Lecornu's minority government announced plans last month for a €54bn savings drive to stave off a catastrophic downgrade or sovereign default. French debt has seen pressure mount as politicians struggle to curb the budget deficit ahead of a divisive election in 2027.
Worries about France’s ability to rein in its budget deficit and Eurozone bond-market turmoil elevated fears of a potential sovereign debt crisis in the bloc and dampened expectations for further rate hikes from the European Central Bank (ECB). This, in turn, could exert some selling pressure on the shared currency.
"It just seems to me like the market is rejecting this 2027 budget. There's an election coming up ... who's going to vote for fiscal austerity with elections coming up?" said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull in Toronto.
Hawkish Minutes from the Federal Open Market Committee (FOMC) indicated policymakers at the US central bank viewed inflation as the biggest risk to their outlook. Fed funds futures are now pricing an implied 22% chance of a 25-basis-point hike at the Fed's October policy meeting, unchanged from a day earlier, according to the CME Group's FedWatch tool.
Euro under pressure from widening US yield advantage but ABN Amro sees limited further EUR/USD downside
Strategists at ABN Amro note that “more negative German–US yield spreads continue to weigh on the Euro versus the Dollar,” with the interest rate gap between the two countries having “become more negative, which provided support to US Dollar against the Euro.” They highlight that this trend has been evident “in the two-year and ten-year nominal yield spreads, as well as in the ten-year real yield spread between Germany and the US,” and that “EUR/USD moved in line with these increasingly negative spreads, as shown in the two graphs below.”
In addition to the yield dynamics, ABN Amro points out that “fiscal and political uncertainty in France is adding pressure on the Euro,” while “financial markets are pricing in too many rate increases by the Fed and the ECB.” The bank contrasts market pricing with its own projections, observing that “markets expect more than three additional Fed increases by 2027, compared with our forecast of only one,” and that “they also expect slightly fewer than three ECB increases by September next year, compared with our forecast of two.”
Against this backdrop, ABN Amro still “expect limited further EUR/USD weakness and maintain our end-2026 forecast at 1.15.” The bank argues that “if market expectations move closer to our forecasts, the adjustment should put more downward pressure on the Dollar than on the Euro, helping to limit further declines in EUR/USD.”
Schmid flags AI-driven inflation and signals more Fed tightening ahead
Fed’s Schmid delivers a distinctly hawkish message, with an 8/10 FXS Speechtracker score that is modestly above the 7.5/10 historical average, underscoring a stronger-than-usual focus on inflation risks. The emphasis that the labor force “remains in a good place” alongside frustration over stubborn inflation, AI as a “largest driver” of price pressures, and the need for further short-rate tightening despite higher long-term yields collectively point to a Fed stance that prioritizes restoring credibility over early easing.
The FXS Fed Sentiment Index rises by 0.34 points to 137.91, reinforcing that the broader Fed tone remains firmly in hawkish territory well above the neutral 100 threshold. This incremental uptick, aligned with Schmid’s above-baseline hawkish score, suggests that markets should continue to price a higher-for-longer path for the Dollar rather than anticipate imminent policy loosening.
Technical Analysis: EUR/USD retains a negative tone amid oversold conditions
In the daily chart, EUR/USD extends its slide beneath the 100-day simple moving average (SMA) and the Bollinger Bands’ middle line, which keeps the pair under a clear bearish bias. Price is holding just above the lower Bollinger Band support, while the Relative Strength Index (14) around 23 underlines oversold conditions that may slow the downside, but do not yet suggest a sustainable reversal while the pair remains capped by the overhead moving average structure.
On the downside, immediate support is located at the lower Bollinger Band at 1.1140, where sellers could start to book profits if oversold readings persist. On the topside, initial resistance appears at the Bollinger middle band at 1.1380, followed by the 100-day SMA at 1.1495 and the upper Bollinger band near 1.1620; only a recovery above these successive barriers would ease the bearish pressure and open the door to a more constructive medium-term tone.
(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.
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