EUR/USD declines to near 1.1245 in the early session on Monday. France’s fiscal risks exert pressure on the Euro. Traders have scaled back their expectations for a Federal Reserve rate increase in October, prompted by disappointing US employment figures. The euro has weakened, trading below the 1.1250 mark, influenced by concerns regarding France’s fiscal risk. The EUR/USD pair experiences a decline in momentum, settling at approximately 1.1245 during the early Asian session on Monday. The Euro weakens against the US Dollar amid fears over France’s shaky fiscal trajectory. The US ISM Services Purchasing Managers Index report is scheduled for release later on Monday. French Prime Minister Sébastien Lecornu’s minority government has presented a controversial draft budget for 2027, amounting to €54 billion, aimed at preventing a potential downgrade or sovereign default. Nonetheless, analysts express scepticism regarding the ability of the minority government in France to pass the budget in Parliament without making concessions.
A report revealed that the public debt in France now stands at 119% of Gross Domestic Product. French government bonds have encountered selling pressure in recent weeks, driven by expectations of increasing policy rates and escalating political risks. French 10-year yields surged to their peak since 2002 last week. Across the pond, traders have diminished their expectations regarding a potential interest rate hike by the US Federal Reserve this month, in light of the recent weaker US jobs data. Traders are currently estimating a 77.9% probability that interest rates will remain stable during the Federal Reserve’s policy meeting in October, an increase from the previous 74% prior to the release of the data. Analysts note that underlying price pressures remain contained, observing that “core inflation has drifted only modestly higher since late February, rising from 2.2% in January to 2.5% y/y in September.” They add that policy communication has turned more cautious, with President “Lagarde [having] highlighted the downside risks to both growth and inflation arising from higher yields.” Standard Chartered argues that “these factors limit the likelihood of an October hike, in our view,” and concludes that “on balance, [they] think that the Governing Council would prefer to wait for new macroeconomic projections to deliver a policy rate change, the next of which will accompany the December policy meeting.”
Fed’s Logan adopts a notably more hawkish stance, as evidenced by the 9.2/10 FXS Speechtracker score, which significantly exceeds the historical average of 8.1/10, indicating a heightened commitment to the necessity of tighter policy. The emphasis that higher yields may reflect increased term premiums, potentially reducing the need for further tightening, is overshadowed by explicit guidance that the policy rate must rise by at least 50 bps and likely through several additional hikes to restore price stability, reinforcing upside risks for the Dollar and front-end yields. Logan’s recognition that the existing policy remains accommodative, coupled with a robust economic expansion and a well-functioning labour market, highlights a distinct inclination for additional rate hikes until inflation is convincingly aligned with the 2% target. The FXS Fed Sentiment Index has increased by 1.68 points to 136.59, remaining firmly in hawkish territory and aligning with the elevated FXS Speechtracker score. This move confirms that Fed communication is becoming increasingly hawkish compared to the established baseline, reinforcing expectations for further tightening and bolstering the Dollar against lower-yielding counterparts.
In the daily chart, EUR/USD continues its decline below the 100-day simple moving average and the middle line of the Bollinger Bands, which now serve as resistance for the pair and establish a distinctly bearish outlook in the near term. Price is positioned marginally above the lower Bollinger band, with the Relative Strength Index (14) registering at 20.2, indicating an oversold condition. This scenario implies that although downward pressure prevails, the extent of the sell-off appears to be reaching an extreme. On the topside, initial resistance is positioned at the Bollinger middle band near 1.1440, followed by the 100-day SMA at 1.1510, with a more formidable barrier at the upper Bollinger band around 1.1685. On the downside, immediate support is provided by the lower Bollinger band at 1.1200; a sustained break below this level would pave the way for additional losses, while any rebound from this area would likely face challenges as long as the pair remains constrained beneath the previously mentioned moving average and volatility band resistances.
