EUR/USD rebounds to near 1.1200. Concerns regarding France’s fiscal stance in the lead-up to the 2027 presidential election are exerting downward pressure on the Euro. Federal Reserve policymakers anticipate an additional interest rate increase, as indicated in the minutes. The EUR/USD pair recovers some lost ground to around 1.1200 during the early Asian session on Thursday. However, the potential upside for the major pair might be limited as France’s fiscal concerns continued to weigh on the Euro. Traders are poised for the forthcoming release of the US weekly Initial Jobless Claims report, alongside anticipated comments from Federal Reserve officials later on Thursday. French Prime Minister Sébastien Lecornu’s minority government announced plans last month for a €54bn savings drive to stave off a catastrophic downgrade or sovereign default. French debt is experiencing increasing pressure as politicians grapple with the challenge of reducing the budget deficit in anticipation of a contentious election in 2027. Concerns regarding France’s capacity to manage its budget deficit, coupled with turmoil in the Eurozone bond market, have heightened apprehensions about a possible sovereign debt crisis within the bloc. This situation has also tempered expectations for additional rate increases from the European Central Bank.
This, in turn, could exert some selling pressure on the shared currency. “It just seems to me like the market is rejecting this 2027 budget. There’s an election coming up … who’s going to vote for fiscal austerity with elections coming up?” said Erik Bregar. Hawkish minutes from the Federal Open Market Committee revealed that policymakers at the US central bank perceive inflation as the primary threat to their economic outlook. Fed funds futures currently indicate an implied 22% probability of a 25-basis-point increase at the Federal Reserve’s October policy meeting, remaining consistent with the previous day’s assessment, as reported by the CME Group’s FedWatch tool. The Euro is facing pressure due to the expanding yield advantage of the US, yet ABN Amro anticipates that the potential for further downside in the EUR/USD pair is limited. Strategists note that “more negative German–US yield spreads continue to weigh on the Euro versus the Dollar,” with the interest rate gap between the two countries having “become more negative, which provided support to US Dollar against the Euro.”
They highlight that this trend has been evident “in the two-year and ten-year nominal yield spreads, as well as in the ten-year real yield spread between Germany and the US,” and that “EUR/USD moved in line with these increasingly negative spreads, as shown in the two graphs below.” In addition to the yield dynamics, ABN Amro points out that “fiscal and political uncertainty in France is adding pressure on the Euro,” while “financial markets are pricing in too many rate increases by the Fed and the ECB.” The bank contrasts market pricing with its own projections, observing that “markets expect more than three additional Fed increases by 2027, compared with our forecast of only one,” and that “they also expect slightly fewer than three ECB increases by September next year, compared with our forecast of two.” Against this backdrop, ABN Amro still “expect limited further EUR/USD weakness and maintain our end-2026 forecast at 1.15.” The bank argues that “if market expectations move closer to our forecasts, the adjustment should put more downward pressure on the Dollar than on the Euro, helping to limit further declines in EUR/USD.”
Fed’s Schmid delivers a distinctly hawkish message, with an 8/10 FXS Speechtracker score that is modestly above the 7.5/10 historical average, underscoring a stronger-than-usual focus on inflation risks. The emphasis that the labour force “remains in a good place” alongside frustration over stubborn inflation, AI as a “largest driver” of price pressures, and the need for further short-rate tightening despite higher long-term yields collectively indicate a Federal Reserve stance that prioritises restoring credibility over early easing. The FXS Fed Sentiment Index has increased by 0.34 points to 137.91, indicating that the overall stance of the Federal Reserve continues to be decisively hawkish, significantly surpassing the neutral threshold of 100. This incremental uptick, aligned with Schmid’s above-baseline hawkish score, suggests that markets should continue to price a higher-for-longer path for the Dollar rather than anticipate imminent policy loosening.
In the daily chart, EUR/USD continues its descent below the 100-day simple moving average and the middle line of the Bollinger Bands, maintaining a distinct bearish outlook for the pair. Price is maintaining a position just above the lower Bollinger Band support, with the Relative Strength Index (14) hovering around 23, indicating oversold conditions that could temper further declines. However, these factors do not yet imply a durable reversal, particularly as the pair continues to be constrained by the prevailing moving average structure. On the downside, immediate support is situated at the lower Bollinger Band at 1.1140, where sellers may begin to realise profits should oversold conditions continue. On the topside, initial resistance is observed at the Bollinger middle band at 1.1380, followed by the 100-day SMA at 1.1495 and the upper Bollinger band near 1.1620; only a recovery above these successive barriers would alleviate the bearish pressure and pave the way for a more constructive medium-term outlook.
