France-Germany yield gap approaches 2011 extreme, euro at risk
The gap between French and German 10-year borrowing costs has widened to 175 basis points, nearing the roughly 190-bp peak reached during the 2011 crisis, and Brown Brothers Harriman cautions EUR/USD could drop toward 1.1000 should it keep growing.
Brown Brothers Harriman (BBH) strategist Elias Haddad identified France’s deteriorating public finances as the single biggest danger facing the shared currency. According to Haddad, the gap between French and German yields has climbed by more than 100 basis points since late February and could push toward 250 basis points if it mirrors the trajectory of Italy’s 2018 budget standoff — a move that would likely pull EUR/USD down near 1.1000.
Haddad tempered the warning with several qualifications. He noted that the current French widening amounts to roughly half of what Italy experienced at its 2018 peak, and that worries about a eurozone fracture remain contained for now: the Sentix gauge tracking breakup fears registered just 2.4% this September, far below the approximately 13% level seen during Italy’s turmoil. He also pointed to the ECB’s Transmission Protection Instrument, a tool permitting targeted bond buying tied to fiscal conditions, as a buffer against spillover effects. Looking further ahead, Haddad suggested France’s 2027 presidential vote could serve as a pivotal moment, provided it produces a credible path to narrowing the deficit.
ING analyst Chris Turner offered a different read, suggesting the euro’s firmness in spite of rising energy costs and the stalled French budget negotiations stems less from domestic politics and more from an orderly unwinding of crowded bets on US technology shares and the dollar. Turner noted that markets have kept pricing in roughly 75 basis points of additional Fed tightening over recent weeks, a stance he expects to persist and which should keep the greenback well-supported while limiting euro upside. ING’s projection for EUR/USD over a one-month horizon sits at 1.13, though Turner flagged that a break above 1.1270-1.1275 could open a path toward 1.1340-1.1350 if dollar weakness tied to tech-sector jitters intensifies.
Separately, Commerzbank’s Thu Lan Nguyen examined remarks from ECB Chief Economist Philip Lane advocating a larger global footprint for the euro, which Lane believes would sharpen the transmission of monetary policy. While Nguyen viewed the proposal favorably, she stressed that such a shift would not by itself guarantee stable prices or policy credibility, since inflation outcomes are also shaped by fiscal decisions and external disruptions.
Why it matters for markets: A growing French-German bond spread signals rising fragmentation risk across the eurozone and could weigh further on EUR/USD, even as steady Fed rate expectations continue to underpin the dollar. Traders are likely to keep watching this spread closely, alongside upcoming ECB and Fed policy meetings, as key signals for euro positioning and eurozone bond markets going forward.
Source: FXStreet