EUR/USD: French bond spreads near crisis levels as ECB meeting looms this week

EUR/USD closed at 1.1204 on 24 October, little changed over the past week but down over the past month [1]. The pair trades below both its 50-day moving average of 1.1363 and its 200-day moving average of 1.1524, with the daily trend reading as down and the 14-day RSI at 37 [1]. The euro has struggled to benefit from a broadly softer US dollar tone this week, with strategists at Scotiabank describing sentiment and momentum as soft [2]. Pressure has come mainly from French government bond markets, where the OAT-Bund spread has widened sharply, while Brown Brothers Harriman and ING both flagged renewed downside risk for the pair should French spreads keep widening [3][4].

The flash composite PMI for the euro area slowed to 51.9 in October from 53.1, missing expectations, with both manufacturing and services softening and France's services sector slipping back into contraction [5]. German producer prices rose 6.7% year on year in September, above forecast and the highest since March 2023, driven mainly by energy costs [6]. The German ZEW economic sentiment index fell to 28.1 from 34.7, missing forecasts, even as the current conditions component improved to -35.9 [7][8]. In France, the 10-year yield rose above 5% for the first time since 2002, with the spread over German Bunds widening to as much as 178 basis points this week, close to the roughly 190 basis points seen during the 2011 crisis, as street protests and budget deadlock continued [3][9][10]. Italian and Belgian yields have also risen, though by less than France's [10]. Commerzbank said markets currently price an ECB hike in December with more tightening into next year, a view it said could be revised lower given the French and fiscal backdrop [11]. Traders were pricing roughly a 16.1% chance of a Federal Reserve rate increase at its late-October meeting, with over 90% odds of a December move, according to the CME FedWatch tool cited by FXStreet [12].

EUR/USD's last close of 1.1204 sits below its 50-day and 200-day moving averages, both pointed lower, confirming the downtrend reading [1]. Nearest support lies at 1.1161, with the next level at 1.1113, which also marks the 52-week low set on 14 October [1]. Resistance sits at 1.1269, the most recent swing high from 16 October, with the next resistance further out at 1.1473 [1]. The RSI at 37 is not yet in oversold territory, and the average daily range of 0.0048 points to a market moving in modest daily increments [1]. On the weekly chart, the close remains below both the 10-week and 40-week averages [1].

A stabilisation or narrowing in the French-German OAT-Bund spread, particularly a retreat from levels near 178 basis points, would ease one of the main sources of euro pressure cited this week [3][4]. ING said the euro's sensitivity to France could re-establish rapidly if the spread approaches 200 basis points, a threshold worth watching [4]. A firmer signal from the ECB on further tightening, or a reversal of recent Federal Reserve rate-hike pricing, would also change the balance of the ECB-Fed rate gap discussed by Commerzbank and MUFG [11][13]. On the chart, a daily close back above the 1.1269 resistance level, or a break below the 1.1113 support, would mark a shift from the current range [1].

Euro area Monetary Policy Statement and Main Refinancing Rate decision, with ECB Press Conference, Thursday 29 October [14].
Germany Prelim CPI and Prelim GDP, Friday 30 October [14].
US FOMC Statement, Federal Funds Rate decision and Press Conference, Wednesday 28 October [14].
US Advance GDP and Core PCE Price Index, Thursday 29 October [14].
Moody's was set to update its rating on France's debt after US markets closed on Friday 23 October [15].

1. Daily prices: EODHD and Yahoo Finance; trend, levels and RSI computed by Praevis
2. FXStreet: Euro: Recovery capped by French spread tensions against US Dollar – Scotiabank
3. FXStreet: France's bond spreads near the 2011 crisis record: Why 1.1000 looms for the Euro
4. FXStreet: Euro: France-linked spread risks keep EUR unattractive – ING
5. investingLive: Eurozone October PMI misses estimates as growth slows, keeping ECB rate hike dilemma alive
6. investingLive: German producer prices hit highest since March 2023 as energy costs soar, fueling inflation worries
7. FXStreet: Germany ZEW Survey - Economic Sentiment deteriorates significantly to 28.1 in October
8. investingLive: Germany October ZEW survey current conditions -35.9 vs -45.0 expected
9. FXStreet: France’s 10-year bond yield climbs above 5% stirring fears of a credit crisis
10. Economic Times Markets: Global Market: French bond selloff raises debt concerns across Europe amid social unrest
11. FXStreet: Euro: France risks and ECB expectations keep EUR/USD steady – Commerzbank
12. FXStreet: Euro weakens below 1.1250 as French protests and fiscal risks weigh
13. investingLive: ECB preview: MUFG sees October hold, two hikes ahead. See EUR/USD year end at 1.12
14. Praevis economic calendar
15. MarketWatch: France is getting its credit rating reviewed. The French debt turmoil has helped turn U.S. Treasury yields around. What comes next?