Euro holds above 1.1200 despite paring gains as France stays in focus

• EUR/USD trades around 1.1220, having met resistance just above 1.1260 on Tuesday.
• Political uncertainty and debt concerns in France leave investors reluctant to take sizeable Euro positions.
• Uncertainty over the extent of the Fed’s tightening cycle continues to weigh on the US Dollar.

At 1.1220 on Wednesday, EUR/USD has slipped back after its advance stalled just above 1.1260 on Tuesday. The Euro (EUR) is surrendering some of its recent gains against the US Dollar (USD), as unrest in France unsettles investors and French borrowing costs continue to rise.

Partial curfews were imposed in several French cities this week after student protests turned violent last weekend. The demonstrations had spread across the country over the preceding few weeks, before scenes of looting and destruction were broadcast around the world.

Rising French borrowing costs hold back the Euro’s recovery

At 4.98%, the yield on France’s 10-year OAT has reached its highest level in 24 years as the country’s debt premium continues to climb. Its spread over the German Bund, regarded as the safer asset, has widened to 157 basis points. This measure of France’s risk premium is now at its highest since the 2009-2011 financial crisis.

Further losses in the pair are nevertheless being limited by a weak US Dollar, which offers the Euro some support. With no major US macroeconomic releases to provide direction, the Dollar is struggling for momentum. Investors are preparing for a pause by the Federal Reserve (Fed) next week while assessing how far the monetary tightening cycle will extend.

ING: AI concerns and a changing Fed Oil response weigh on the Dollar

A combination of lingering AI concerns and the unwinding of extended positions is weighing on the Dollar, according to ING analysts. They note that it “continues to trade with a soft undertone,” citing “a mix of some aftereffects of AI-related concerns (Corewave bonds had another wobble yesterday) and stretched longs/ short-term overvaluations being unwound.”

The currency’s response to energy prices is also undergoing a subtle change, ING suggests, noting that “the dollar’s reaction function to Oil may have changed over the past week or so.” The analysts argue that “rising concerns about tech stocks have somewhat dented the market’s hawkish conviction on the Fed, allowing for greater dovish flexibility at the front end in response to non-data inputs like an oil selloff,” a development that is adding to the Dollar’s softer tone.