Euro retreats as US Dollar regains ground, France's debt worries weigh

• EUR/USD reverses earlier gains as the US Dollar rebounds from three-week lows.
• France's fiscal concerns and widening bond yield spreads continue to weigh on the Euro.
• Weak Eurozone Consumer Confidence adds to pressure as traders await the Fed and ECB policy decisions.

EUR/USD loses 0.33% on Thursday, reversing earlier gains as the US Dollar (USD) stages a rebound after slipping to a three-week low during Asian trading hours. Meanwhile, political turmoil in France and uncertainty surrounding the country's fiscal outlook continue to weigh on the Euro (EUR). At the time of writing, the pair trades around 1.1195, retreating from an intraday high of 1.1256.

Persistent concerns over France's ability to repair its public finances, combined with street protests, are driving investors away from French government bonds, pushing the benchmark 10-year yield above 5% for the first time since 2002 and widening its spread over German government bond yields.

Strategists at Brown Brothers Harriman note that France’s fiscal concerns are increasingly being reflected in bond markets, with the “French 10-year bond yield premium over Germany … up over 100bps since late February to 175bps, closing in on its 2011 record high of around 190bps.” They argue that, if “Italy’s 2018 budget crisis is any guide,” the spread “can widen to about 250bps and drag EUR/USD down to 1.1000.”

Looking further ahead, BBH suggests that “France’s 2027 presidential election could offer a similar turning point, but only if it produces a government able to deliver credible deficit reduction.” Until such a shift materialises, they caution that “French spreads remain vulnerable to further widening, keeping EUR/USD under pressure.”

Adding to the Euro's woes, preliminary data showed that Eurozone Consumer Confidence deteriorated to -17.9 in October, below expectations of -17 and the previous reading of -16.5.

Across the Atlantic, the Greenback rebounds even as US Treasury yields extend their correction from multi-year highs, driven by increased demand for government bonds as concerns over AI-related investments weigh on global equities. The benchmark 10-year US Treasury yield trades around 5.06%, after reaching a high of 5.36% earlier this month.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 101.85 after touching an intraday low of 101.45.

On the monetary policy front, traders widely expect both the Federal Reserve (Fed) and the European Central Bank (ECB) to leave interest rates unchanged at their October meetings. However, expectations of additional rate hikes by year-end remain in place as energy-driven inflation risks linked to Middle East tensions threaten to keep inflation above both central banks' respective 2% targets.

Oil prices have climbed to five-week highs following reports that the US and Israel are considering renewed strikes against Iran after the US midterm elections. At the same time, continued Houthi attacks in Saudi Arabia are adding to supply risks across the Gulf region.