EUR/USD Takes Hit as French Debt Sell-Off Fuels Risk Premium Surge
Market interest rates reached an inflection point yesterday due to the French debt sell-off, breaking the narrative of ever-higher short-term market interest rates, according to ING's Chris Turner. This development raises doubts about further European Central Bank (ECB) tightening.
The French debt sell-off has led to increased risk premium on the Euro, making investors question whether central banks are heading into policy error territory with tightening cycles. As a result, the ECB may have less cause to tighten than the Federal Reserve.
TMGM analysis suggests that if the bond market sell-off extends, markets could add another 2% in risk premium to the euro. The near-term EUR/USD looks biased towards 1.1100-1120, or even closer to 1.10.
Investors are anticipating an ECB fix to the bond market sell-off, either through reduced tightening of policy (Euro bearish) or the use of the Transmission Protection Instrument to buy bonds (very Euro bearish).