Euro Faces Downside Risks as French Spread Widening Spills Over

The euro is facing potential fiscal troubles as the French-German 10-year spread has reached 130bp, sparking concerns of widening eurozone spreads spilling over into the euro. This morning's market chatter suggests that bond market stress is feeding into FX markets, with both EUR/USD and EUR/CHF moving lower.

The Swiss franc had been bearish until this morning, weighed down by a dovish surprise from the Swiss National Bank last week. However, the dollar continues to benefit from broad-based support, driven by tighter global financial conditions, elevated energy prices, and a hawkish Fed.

ING's analysts believe that France's budget announcement has bought some time but fails to address structural deficit issues. They predict that 150bp may be the next step for the 10yr OAT-Bund spread, which would create material downside risks for the euro.