Euro faces greater downside pressure from French risks – ING

With the 10-year OAT-Bund spread approaching its early October highs, French bonds are under renewed pressure as budget concerns and social unrest undermine sentiment, according to ING’s Francesco Pesole. He identifies EUR/CHF as the principal channel through which French risk is transmitted to the FX market, with a risk of further declines below key support. EUR/USD could enter a period of consolidation, while EUR/GBP remains under selling pressure as the Pound strengthens and expectations of BoE tightening build.

French spreads widen as risk feeds through to FX

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"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.)