Euro holds gains above 1.1200 despite France's fiscal worries
- EUR/USD gains momentum to around 1.1215 in Friday’s early Asian session.
- The Euro remains under pressure on France's fiscal worries.
- The chance of an October Fed hike fell to 17.7% from about 38% a week ago.
The EUR/USD pair holds positive ground near 1.1215 during the early Asian trading hours on Friday. Nonetheless, the potential upside for the major pair might be limited amid fears of France’s debt crisis. The Michigan Consumer Sentiment Index data for October is due later on Friday.
The spread between French and German 10-year bond yields posted its biggest weekly jump in decades last week as traders dump French bonds in favor of safer German bunds. 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.
Worries about France’s ability to rein in its budget deficit and a sharp bond market selloff last week elevated fears of a potential sovereign debt crisis in the Eurozone. This, in turn, could exert some selling pressure on the shared currency in the near term.
"The euro remains under pressure, limiting one of the dollar’s main alternatives," said Uto Shinohara, senior investment strategist at Mesirow Currency Management.
The FOMC Minutes showed policymakers were divided in September over the rationale for lifting interest rates, with "some participants" seeing a hike as needed to keep the impact of energy and other price shocks at bay, but a more hawkish core viewing it as necessary to guard against emerging demand-driven inflation.
The probability of a rate hike of at least 25 basis points (bps) at the Fed's meeting later this month stands at 17.7%, from about 38% a week ago, according to the CME FedWatch tool. Markets are pricing in an 83% odds of a hike at the Fed's December meeting.
Euro under pressure as ECB tightening scope fails to offset stronger US growth
Strategists at Brown Brothers Harriman note that the ECB’s recent policy move and the forthcoming Account are unlikely to materially shift the broader EUR/USD narrative. They recall that “at that meeting, the ECB unanimously voted to raise the policy rate 25bps to 2.50%,” and expect the minutes to “reinforce the case for further hikes, but the message will look somewhat dated given the recent surge in bond yields.”
BBH argues that “above target Eurozone inflation and a firmer growth outlook give the ECB scope to deliver additional hikes,” with the “swaps curve [implying] nearly 75bps of tightening to 3.25% in the next twelve months.” In their view, “that limits policy divergence with the Fed and the drag on EUR/USD.” However, they caution that “stronger US growth traction relative to the Eurozone and France’s worsening budget crisis keep EUR/USD risk skewed to the downside.”
Waller flags more hikes but flexible pace keeps Dollar bulls alert
Fed’s Waller delivered a distinctly hawkish tone, with an FXS Speechtracker score of 8/10, above the established baseline of 7.2/10, underscoring a stronger-than-usual tightening bias. The emphasis that “more hikes [are] needed but flexible about the pace” and that further moves need not be at consecutive meetings signals a higher terminal rate but a less mechanical path, while persistent inflation drivers such as AI buildout and energy shocks, alongside a strengthening economy and a “solid and stable” labor market, reinforce the case for keeping policy restrictive to safeguard inflation expectations. Overall, the speech points to sustained support for the Dollar, even if the cadence of future moves becomes more data-dependent.
The FXS Fed Sentiment Index rose by 0.42 points to 138.34, firmly in hawkish territory well above the neutral 100 mark, aligning with the elevated FXS Speechtracker reading. This combination suggests markets should price in a higher-for-longer Fed stance, with signaling replacing explicit forward guidance but still anchoring expectations for further tightening.
Technical Analysis: EUR/USD retains a negative tone amid oversold conditions
In the daily chart, EUR/USD maintains a bearish near-term bias as spot holds below the 20-period Bollinger simple moving average (SMA) and the 100-day SMA. Price is only modestly above the lower Bollinger band, while the Relative Strength Index (14) at 26.1 hovers in oversold territory, suggesting selling pressure is stretched but not yet reversed.
On the topside, initial resistance emerges at the Bollinger middle band SMA around 1.1360, followed by the 100-day SMA at 1.1495 and the upper Bollinger band near 1.1585. On the downside, the lower Bollinger band at 1.1135 forms the first meaningful support area, and a clear break beneath this floor would open the path for an extension of the prevailing downtrend.
(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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