EUR/USD Forecast: France’s Fiscal Risks are Mounting as Yields Near 5%

EUR/USD, France Key Points

• France’s borrowing costs have climbed to their highest levels in more than two decades, with 10-year OATs testing 5.00%.
• The country’s deficit is expected to remain above 5% of GDP this year, and interest costs on government debt are projected to reach about €91 billion in 2027.
• EUR/USD has been trending lower along with the widening spread between German and French bond yields.

In an eerie echo of 2010’s European sovereign debt crisis, traders all around the globe are once again pulling up a charts of intra-European bond yields, but this time around, the concerns are closer to the core than the periphery.

France’s borrowing costs have climbed to their highest levels in more than two decades, putting renewed focus on the country’s finances and political stability. The yield on its 10-year government bond, known as the OAT, approached 5.00% last week before easing to around 4.90% as of writing.

The gap between French and German 10-year yields has also widened sharply. It briefly reached about 150 basis points on Friday, its widest since the Eurozone debt crisis, though that spread now narrowed incrementally toward 140bps today. Investors use this spread to gauge how much extra return they require to hold French debt rather than Germany’s, which is seen as a safer benchmark.

Some of the increase undoubtedly reflects a broader rise in global bond yields. That said, France is facing added pressure because investors are questioning whether its government can rein in the budget deficit and pass a workable plan through a divided parliament.

Prime Minister Sébastien Lecornu’s proposed 2027 budget includes tens of billions of euros in savings and revenue measures, but opposition parties have threatened to block the plan or bring down the government. This is all taking place ahead of a presidential election next spring.

France’s fiscal dilemma is significant. The country’s deficit is expected to remain above 5% of GDP this year, and interest costs on government debt are projected to reach about €91 billion in 2027. France also plans record bond issuance next year, exacerbating the pressure on the country’s finances if yields remain elevated.

Adding insult to injury, Sumitomo Mitsui DS Asset Management, a major Japanese investor, reportedly sold its French government bonds and shifted the money mainly into German debt and short-term Japanese bonds, citing fiscal concerns.

In a tale as old as time, markets are likely to remain on edge watching France’s political situation in the coming days, with a direct impact on the value of the euro itself.

Euro Technical Analysis – EUR/USD Daily Chart

Source: TradingView, StoneX

As the chart above shows, the world’s most widely-traded currency pair has been trending lower within a bearish channel for the last month now. Looking at the overlayed German-French 10yr bond yield spread, the widening spread has been a major catalyst for the ongoing selloff as traders question whether France has the political will to get its fiscal house in order.

Moving forward, there are some signs that at least a near-term bounce could emerge. EUR/USD is showing a clear bullish divergence with its 14-period RSI, showing waning selling momentum, and the German-French yield spread is bouncing off the intraday lows. Nonetheless, traders are likely to view any short-term rallies as selling opportunities unless/until the pair can break above its bearishchannel and clear the 1.1300 handle. Meanwhile, the next important downside support level to watch is the 50% Fibonacci retracement of the 2025-26 rally near 1.1135.

-- Written by Matt Weller, Global Head of Research

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