Euro: French Risks Add to Downside Pressure – ING

The 10-year OAT-Bund spread is approaching its early October highs. ING’s Francesco Pesole points to fresh pressure on French bonds as budget concerns and social unrest dampen sentiment. EUR/CHF is viewed as the principal FX outlet for French risk, with a potential break below key support posing downside risks. EUR/USD may consolidate, while Pound strength and expectations of BoE tightening are putting EUR/GBP under selling pressure.

French Spreads: FX Channels for Risk

"French bonds sold off again yesterday, with the 10yr OAT-Bund spread widening to 157bp at one point, close to the 159bp 2 October high. Lingering concerns about the budget are clearly being compounded by rising social unrest. Our France economist discusses here the potential economic implications of the riots."

"With EUR/USD affected by softish USD momentum, EUR/CHF remains the clearer exhaust valve of French risk into FX. Yesterday saw another attempted break lower, with support emerging again around 0.9230, close to the 200-day MA. A break below that level could prompt a gap to below 0.920."

"Risks remain on the downside there. In EUR/USD, we could see some further consolidation at 1.120-1.125."

"EUR/GBP also continues to show intense selling pressure, having broken below 0.840. While French risk is playing a role, the pound is emerging as an outperformer in G10. Markets are sinking their teeth into a positive UK growth story and BoE tightening alongside expectations that next week’s budget won’t deliver any real surprises (here’s what could go wrong)."

"While a November hike by the BoE appears likely now, expectations for 100bp worth of tightening by June remain way too hawkish in our view. The pound’s rally is looking stretched by short-term valuation metrics, and we see growing risks of corrections, both vs EUR and USD."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)