EUR/USD falls as troubles in France weigh
EUR/USD is falling on Monday amid concerns over higher energy prices and France's political stability. The pair continues to hold above the 1.11 level reached last Wednesday. However, the fundamental backdrop suggests that the path of least resistance remains to the downside.
Attention is on France's fiscal position as the government struggles to pass a deficit-reducing budget ahead of upcoming elections. The spread between French and German 10-year government bond yields has widened sharply, reflecting rising concerns over France's fiscal and political outlook. The spread has reportedly widened by around 40 basis points to 150 basis points, its highest level since the eurozone debt crisis in 2011. This is increasing risk premiums across the bloc and raising concerns over contagion. Combined with some of the worst riots seen in years, the political turmoil is also weighing on sentiment.
President Macron has declined Interior Minister Laurent Nuñez's offer to resign.
Elsewhere, natural gas prices have surged to their highest levels in four years as the Northern Hemisphere enters winter. Europe is particularly vulnerable given that gas storage levels are reportedly at their lowest on record. As a result, Europe could face another period of elevated gas prices, even if the war in Iran is resolved and winter proves mild. While the region is not facing an outright supply shortage, it lacks sufficient operational buffers, meaning any disruption could send prices higher. This would add to energy bills, which are already elevated, and put further pressure on inflation.
Meanwhile, the U.S. dollar presents a further headwind for the pair. The dollar fell last week, pulling back from an 18-month high as Treasury yields moved lower. Safe-haven flows away from technology stocks and into Treasuries helped push the 10-year yield below 5.1%. However, the USD is rising again today.
Federal Reserve Chair Kevin Warsh was unwilling to provide clear signals on the outlook for monetary policy, prompting markets to shift expectations for a potential rate hike towards December rather than October, despite hotter-than-expected U.S. inflation data last week.
Geopolitical risks stemming from tensions in the Middle East and the standoff over the Strait of Hormuz continue to support the safe-haven U.S. dollar.
Overall, the outlook remains bearish for EUR/USD. However, the lack of follow-through selling to take out last week's low warrants some caution.
Attention will remain on developments in France and PMI data later this week.
EUR/USD – forecast technical analysis
EUR/USD trades below its falling trend line and its 50 and 200 EMAs. The pair fell to an 18-month low of 1.1110 before recovering modestly, trading at 1.1215 at the time of writing. The recovery has helped the RSI move out of oversold territory.
On the downside, initial support sits around 1.1160. A break below this level would open the door to 1.1110, before attention turns to 1.1000, the psychological level.
On the upside, initial resistance sits at 1.1300, ahead of the 1.1350 resistance zone and the 50 EMA at 1.1390. A move above this area would help stabilise the outlook.
FTSE falls after strong weekly gains
The FTSE is falling on Monday, pulling back from a two-month high as markets across Europe come under pressure amid escalating protests in France, Belgium, Italy and Portugal.
The move lower follows gains of around 3% last week, when the FTSE enjoyed its strongest weekly rise in six months.
Banking stocks, defence contractors and miners are among the main fallers, overshadowing gains in energy shares.
The weakness in European equities comes as government bonds and stocks sell off across the region, with much of the pressure concentrated on French assets.
UK gilts are firmly in the red, with the 10-year yield up around 3 basis points. However, UK bonds are still outperforming some European peers, particularly French government bonds, as France continues to struggle with political turmoil.
Rising yields are weighing on UK banks. However, the sector may also be under pressure amid concerns that the Chancellor could raise taxes on banks in the Budget. Speaking at the IMF on Friday, Chancellor John Healey said: "I've got decisions to take in the Budget, and I'll set those out in two weeks' time." His comments have added to speculation over potential measures affecting the sector.
Miners initially moved higher, with the likes of Antofagasta and Glencore rising by more than 1%, but those gains were short-lived as copper prices fell. This came despite stronger-than-expected Chinese growth. The world's second-largest economy expanded by 4.5% year on year, beating expectations of 4.4% and accelerating from 4.3% in the previous quarter.
Energy majors are also providing some support to the index, with BP and Shell rising despite oil prices pulling back from their highest levels since mid-September.
This is a big week for UK economic data, with jobs figures on Tuesday, inflation data on Wednesday and retail sales on Friday. These releases come ahead of the Bank of England's interest rate decision in November, with markets pricing in a greater than 90% probability of a 25-basis-point rate hike.
FTSE forecast – technical analysis
The FTSE broke out of a symmetrical triangle pattern to the upside, reaching 10,900, a two-month high, before easing back to 10,780 at the time of writing. The price is retesting the falling trendline, which now acts as support.
Should support hold, buyers will look to push the index back above 10,900 to establish a higher high and bring 10,990 into focus, ahead of fresh record highs.
On the downside, a break below trend-line support at 10,770 would bring the price back into the triangle pattern and expose the 50 EMA at 10,680. A break below here would turn attention to 10,400, where the 200 EMA, rising trend-line support and horizontal support converge. A break below this level could see selling pressure gain traction.
