EUR/USD Drops to a 15-Month Low as French Fiscal Risks Add to Euro Pressure
EUR/USD is falling sharply to a 15-month low amid rising Treasury yields, concerns over the upcoming French budget and despite stronger-than-expected eurozone manufacturing PMI data.
France’s 10-year OAT yield surged 4.9% on Thursday to its highest level since June 2002, ahead of the government’s budget announcement. The government is set to unveil a €54 billion fiscal consolidation plan aimed at reducing the budget deficit to 5% of GDP in 2027.
However, the market is not convinced, with French borrowing costs rising sharply amid the global bond sell-off. The spread over German bonds has widened to 127 basis points, the highest level since the euro-area debt crisis.
France’s debt burden is set to exceed 120% of GDP next year, which, combined with political uncertainty ahead of April’s elections, is driving up borrowing costs and interest expenses.
These concerns are overshadowing stronger eurozone manufacturing PMI data.
Eurozone factory growth accelerated again in September, reaching its fastest pace in more than four years as resilient demand drove new orders higher. The manufacturing PMI rose for a third consecutive month to 52.9 in September, up from 52.7 in August.
U.S. Yields Keep the Dollar Supported
Meanwhile, the U.S. dollar is rising on safe-haven flows amid risk-off trade in Europe and as U.S. Treasury yields remain elevated.
Despite cooler-than-expected U.S. core PCE data yesterday, which saw markets rein in Fed rate hike expectations for October to below 40%, Treasury yields continued to rise.
The 10-year Treasury yield reached its highest level since 2002, partly supported by an upward revision to U.S. GDP growth, with Q2 growth revised to 2.2% annualised.
Attention is now turning to Friday’s non-farm payroll report. Strong jobs numbers could push Treasury yields higher, supporting the U.S. dollar and putting further pressure on EUR/USD.
EUR/USD Forecast – Technical Analysis
EUR/USD has fallen to a 15-month low. The pair trades below a falling trend line and its 50- and 200-day EMAs, maintaining a bearish technical picture.
The price has broken below the 1.1350 support zone and fallen towards 1.1300. The RSI is deeply oversold, suggesting that a period of consolidation or a recovery could be on the cards.
Buyers would need to reclaim the 1.1350 resistance zone before turning attention towards 1.1500, the 50 EMA and horizontal resistance.
Sellers will look to break below 1.1300 to extend the downside move towards 1.1200, levels last seen in early 2025.
FTSE 100 Slumps As Fiscal Concerns Deepen the Bond-Yield Sell-Off
The FTSE 100, along with its European peers, is under pressure on the first day of the new trading quarter.
The index has fallen more than 2% in early trade, reaching its lowest level since June, as elevated bond yields continue to weigh on equities.
This marks a difficult start to the fourth quarter after the FTSE lost 2% across September, its weakest month since March, as higher oil prices and bond yields increased concerns over inflation and interest rates.
The fall in European stocks comes despite cooler-than-expected U.S. core PCE inflation, which has reduced expectations of a Federal Reserve rate hike this month.
Even so, the global bond sell-off has intensified, with the 30-year UK gilt yield reaching 6%, a key psychological level, for the first time since 1998.
In the U.S., the 10-year Treasury yield reached 5.33%, its highest level since 2002.
The move higher in bond yields has been partly driven by oil prices, as has been the case recently. Brent has turned higher and moved back above the $100-a-barrel level.
However, the fact that France and the UK are leading the sell-off suggests that the latest rise in yields may also reflect growing fiscal and political concerns ahead of upcoming budgets.
Markets want to see governments take credible steps to reduce spending and improve their fiscal positions. However, there are concerns over the scale of fiscal consolidation in both France and the UK.
FTSE Forecast – Technical Analysis
The FTSE 100 has broken down from its symmetrical triangle pattern and is heading towards support at the 200 EMA around 10,400.
The RSI is below 50, supporting further downside.
Sellers will look to break below the 200 EMA to open the door to the 10,175 support level seen in June.
On the upside, any recovery needs to rise above the July lows. Above here, attention turns to 10,650, the rising trend-line resistance, and the 50 EMA at 10,700.
A rise above this zone would put the price on a more neutral footing.
