France’s Rising Borrowing Costs Stir Eurozone Concerns

France is facing growing fiscal concerns as borrowing costs hit their highest levels in over two decades. The yield on the country’s 10-year government bond, known as the OAT, neared 5.00% last week before easing slightly to around 4.90%. This surge in borrowing costs comes amid a widening gap between French and German 10-year yields, which briefly reached 150 basis points, the widest since the Eurozone debt crisis, and has since narrowed to about 140 basis points.

The rising yields reflect broader global trends but are exacerbated by doubts over France’s ability to control its budget deficit and pass fiscal reforms. Prime Minister Sébastien Lecornu’s proposed 2027 budget includes significant savings and revenue measures, but opposition parties threaten to block the plan or topple the government ahead of next spring’s presidential election. France’s deficit is projected to stay above 5% of GDP this year, with interest costs on government debt expected to hit €91 billion in 2027.

The financial strain is further highlighted by Sumitomo Mitsui DS Asset Management’s decision to sell French government bonds and shift investments into German debt and short-term Japanese bonds, citing fiscal concerns. The political and fiscal instability in France is weighing on the euro, with EUR/USD trending lower in tandem with the widening yield spread. The currency pair has been declining within a bearish channel for the past month, with key support levels to watch at 1.1135.

Technical indicators suggest a potential near-term bounce for EUR/USD, as the 14-period RSI shows waning selling momentum. However, traders are likely to view any short-term rallies as selling opportunities unless the pair breaks above its bearish channel and clears the 1.1300 handle.