EUR/USD edges lower to near 1.1220 in Tuesday’s early Asian session. Concerns regarding France’s capacity to manage its budget deficit are exerting pressure on the Euro. Traders have scaled back their expectations for a Federal Reserve rate increase this month in light of disappointing US employment figures. The EUR/USD pair experienced a decline, reaching approximately 1.1220 during the early hours of trading in Asia on Tuesday. The Euro weakens near a 17-month low against the US Dollar amid growing concern over France’s debt position. French Prime Minister Sébastien Lecornu’s minority government unveiled plans last month for a €54bn savings initiative aimed at preventing a catastrophic downgrade or sovereign default. Lecornu stated that the savings would lead to a reduction in the budget deficit from 5.5% of GDP this year to 5% next year. He cautioned that in the absence of intervention, the gap between public expenditure and revenue might escalate to 6.5%. Concerns are mounting regarding the escalating costs of France’s debt as the government strives to manage its strained public finances ahead of the presidential election scheduled for next year. This, in turn, exerts a degree of selling pressure on the shared currency.
Furthermore, the political turmoil in Spain may contribute to the downside of the EUR. Spanish Prime Minister Pedro Sanchez has announced a snap election for November 29, aiming to bolster his parliamentary backing following the recent rejection by lawmakers of proposals intended to tackle a housing crisis that has sparked nationwide protests. “Europe is taking the spotlight at the start of the week, as fiscal and political concerns hit the bloc,” stated Kathleen Brooks. “France is the epicentre of the concerns; however, Spain is also set to prepare for an early election, which is contributing to investor anxieties,” Kathleen noted. Reduced expectations of a Federal Reserve rate hike this month could exert downward pressure on the Greenback and serve as a supportive factor for the major pair. The US Nonfarm Payrolls rose by 29K in September, compared to the 133K increase seen in August, as revealed by the US Bureau of Labour Statistics on Friday. This figure fell short of the market consensus of 90K. The Unemployment Rate increased to 4.2% in September, up from 4.1% in August. Markets are currently assigning approximately 22.7% probabilities to the likelihood that the US central bank will increase benchmark borrowing costs during its October policy meeting, as indicated by the CME FedWatch tool.
Strategists note that the ECB’s Transmission Protection Instrument, designed to provide “a backstop against disorderly spread widening,” is not an automatic shield for Eurozone debt markets. They stress that activation is contingent on EU member states pursuing “sound and sustainable fiscal and macroeconomic policies,” a condition that France’s deteriorating finances increasingly struggle to meet. BBH argues that this complicates the case for intervention, even as the risk of broader contagion across Eurozone bond markets would “increase pressure on the ECB to act.” Concurrently, BBH emphasises remarks from ECB Chief Economist Philip Lane, who recently pointed out that the “increase in long-term interest rates constitutes a material tightening of financial conditions for the euro area.” In their assessment, this combination subjects the Euro to ongoing downside pressure, as investors evaluate increasing fiscal risk in light of the possibility of a “potentially shallower ECB hiking cycle.” ECB’s Nagel provides a notably robust hawkish signal, achieving a 7.2/10 on the FXS Speechtracker, surpassing the historical average of 6.6/10, as upward risks are indicated to prevail in the inflation outlook. The emphasis on uncertainty “calling for flexibility, not inaction” indicates a hesitance to prematurely ease policy, which provides marginal support for the Euro. At the same time, Nagel observes that there are “no clear signs” indicating that inflation has influenced price and wage setting, which moderates the hawkish stance and implies a preference for patience over aggressive tightening.
Overall, the speech exhibits a hawkish stance compared to Nagel’s baseline; however, the absence of robust wage-price dynamics allows for data-dependent adjustments rather than a definitive inclination toward immediate rate increases. In the daily chart, EUR/USD maintains a distinct bearish sentiment as it remains below the Bollinger Bands’ 20-day simple moving average and the 100-day moving average. Price is approaching the lower Bollinger band, with the Relative Strength Index (14) hovering around 19, indicating a state of deep oversold conditions. This scenario suggests ongoing selling pressure, yet it also heightens the potential for a corrective bounce from the nearby support level. On the topside, initial resistance is observed at the midline of the Bollinger Bands around 1.1420, succeeded by the 100-day moving average at 1.1505, and subsequently the upper Bollinger band near 1.1670. Collectively, these levels delineate a significant barrier to recovery efforts. On the downside, immediate support is aligned with the lower Bollinger band at 1.1170, and a sustained break below this floor would likely expose the pair to a fresh leg lower in the short term.
