EUR/USD edges slightly higher to around 1.1235 in Thursday’s early Asian session. Widespread anti-government protests in France, coupled with a deteriorating fiscal outlook, may place downward pressure on the Euro. Markets are currently reflecting a modest probability of an interest rate increase in the upcoming week. The EUR/USD pair is experiencing modest gains, hovering around 1.1235 in the early hours of trading on Thursday in the Asian market. However, the potential upside for the major pair may be constrained by apprehensions regarding the political and fiscal landscape in France. Fabio Panetta, a policymaker at the European Central Bank, is scheduled to deliver remarks later today. On Wednesday, French 10-year borrowing costs surpassed 5% for the first time in 24 years. The yield on the benchmark 10-year bond, known as obligation assimilables du Trésor, issued by the French Treasury, increased by over 8 basis points (bps) to 5% in the previous session before declining to 4.99%.
Political concerns and the government’s inability to reach consensus on a protracted budget instill apprehension in the financial markets. This, in turn, could jeopardise the integrity of the shared currency in the near term. French President Emmanuel Macron has committed to ensuring that last weekend’s riots and looting do not recur, as the Yellow Vest movement prepares to organise a significant march in Paris on Saturday, which will pose a substantial challenge for the government. The French debt situation is not manageable. They do need to go in and make proper adjustments on the fiscal side to get this debt level down to at least show the seriousness around the trajectory,” said John Hardy, global head of macro strategy at Saxo in Copenhagen. Across the pond, Fed funds traders perceive a minimal likelihood of a Federal Reserve rate hike next week, with the subsequent interest rate increase anticipated in December, as indicated by the CME FedWatch tool. Fed Chairman Kevin Warsh is also improbable to indicate forthcoming actions.
Analysts highlight that EUR/USD price action has been unexpectedly resilient, remarking that “for EUR/USD, it’s curious that cycle highs in nat gas prices and bond jitters have not triggered another leg down in a way that would have occurred prior to October.” They note that “the correlations have broken down over the past two weeks or so,” with the traditional links between the currency pair, energy prices and bond yields no longer behaving as they did earlier in the cycle. According to the bank, this shift “would suggest that most of the bad news is priced in or investors are not committed to putting on new directional trades, playing the ranges instead.” Fed Chair Warsh delivered a moderately constructive but cautious message, with the FXS Speechtracker score of 5.6/10 coming in slightly softer compared to the established baseline of 6.1/10, underscoring a less emphatic tone than usual. The acknowledgement of being “over-scarred from the Global Financial Crisis” underscores a continued risk-averse inclination. Warsh, however, emphasises structural growth and an investment boom fuelled by “good policies,” asserting that the forthcoming meetings in October and December will serve as the “crystalizing moment” for determinations regarding output, employment, and inflation.
Warsh’s emphasis on AI as a proximate demand shock with ambiguous implications for employment, coupled with initiatives for a field hearing and the establishment of new Fed task forces, indicates an institution striving to leverage technological advancements while remaining vigilant against adverse outcomes and risks to financial stability. The FXS Fed Sentiment Index remained stable, holding at a hawkish 127.51, reflecting no change of 0.00 points. This suggests that, despite a marginal decline in the FXS Speechtracker score, the overarching policy stance continues to be significantly above the neutral threshold of 100. This combination indicates that markets ought to interpret Warsh’s remarks as aligned with a high-bar-for-easing framework, wherein optimism regarding investment and AI-driven productivity is moderated by the lingering effects of past crises and a pronounced emphasis on price stability and tail risks.
In the daily chart, EUR/USD maintains a bearish near-term tone as it remains below the 100-day simple moving average and beneath the Bollinger middle band. Price is consolidating nearer to the lower half of the recent volatility envelope, while the Relative Strength Index (14) at approximately 41 remains beneath the neutral 50 line, suggesting that downside pressure continues to dominate over any recovery efforts. On the topside, initial resistance is observed at the Bollinger middle band near 1.1245, with additional gains likely encountering supply around the upper Bollinger band at 1.1370, preceding the more significant 100-day SMA at 1.1455. On the downside, the next significant support is located at the Bollinger lower band around 1.1120, where a decisive break would pave the way for a continuation of the broader decline.
