Euro: Could French spreads drive losses against US Dollar? – BBH

EUR/USD could face further pressure towards 1.1000 as France’s worsening public finances drive French-German spreads sharply wider, according to Elias Haddad of Brown Brothers Harriman (BBH). With the premium already close to previous crisis highs, Haddad uses Italy’s 2018 budget turmoil as a guide to the potential for further widening. France’s 2027 presidential election may ultimately rebuild confidence, he notes, provided credible deficit reduction is delivered.

Could French fiscal risks put further pressure on EUR/USD?

"French 10-year bond yield premium over Germany is up over 100bps since late February to 175bps, closing in on its 2011 record high of around 190bps. The spread can widen to about 250bps if Italy’s 2018 budget crisis is any guide and drag EUR/USD down to 1.1000."

"France’s widening so far is just over half that size, leaving room for the spread to rise further."

"France’s weaker fiscal backdrop does not mean the crisis will follow Italy’s full course. Euro exit fears played a substantial role in the Italian debt market selloff, whereas those concerns remain muted today. The Sentix euro breakup index stood at 2.4% in September compared with around 13% during Italy’s 2018 crisis."

"In parallel, the ECB’s Transmission Protection Instrument (TPI) introduced in July 2022 reduces the risk of France’s fiscal troubles spilling over to other Eurozone economies. TPI allows the ECB to purchase sovereign bonds with no preset limit, subject to fiscal and debt sustainability checks."

"France’s 2027 presidential election could offer a similar turning point, but only if it produces a government able to deliver credible deficit reduction. Until then, French spreads remain vulnerable to further widening, keeping EUR/USD under pressure."

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