Francesco Pesole of ING warns that widening French sovereign bond spreads could pose risks to the euro, despite the currency's recent resilience. The OAT-Bund 10-year spread closed at 174 basis points after briefly touching 178 basis points the previous day. While the euro has not yet shown significant weakness, Pesole cautions that sensitivity to French sovereign risk could quickly return if spreads approach 200 basis points.
The widening spreads are partly driven by higher beta exposure of French bonds to global factors and concerns over potential social unrest. Although the political and budgetary situation in France has not visibly deteriorated, the OAT-BTP spread has reached a concerning 50 basis points. The euro's diminished link to French spreads may re-establish rapidly if spreads widen further, keeping the currency unattractive across the board.
Pesole identifies EUR/CHF as the best proxy for European sovereign risk and suggests that EUR/USD could re-test the 1.1120 low seen on October 14 if bond market turmoil persists. While further widening is not expected immediately, the risks remain clear, and the euro's outlook remains broadly bearish.