French Bond Turmoil Drives Euro Down Towards 1.1100
The Euro (EUR) is facing significant downward pressure, primarily due to instability in the French bond market. Francesco Pesole at ING notes that this turbulence is introducing a fiscal risk premium and lowering expectations for European Central Bank (ECB) rate hikes. As a result, the EUR/USD exchange rate is under threat, with the potential to drop to 1.1100 or even 1.1000 if bond market stress worsens.
The Euro started the week as the weakest G10 currency, reflecting ongoing concerns over French fiscal policies. The impact is twofold: a direct fiscal risk premium and an indirect effect through reduced expectations for ECB rate increases. Pricing for the March ECB meeting has dropped sharply, from 80 basis points on September 24 to just 45 basis points now.
This shift has pushed the EUR/USD two-year swap rate differential to -167 basis points, a level last seen in August 2025. Although there was a brief recovery to just above 1.1200 after a dip to 1.1160, ING remains skeptical about a sustained rebound. The fiscal risk premium, while still relatively modest, leaves room for further declines in the EUR/USD rate.
Market attention is now focused on details from Marine Le Pen regarding a counter-budget, which could further influence the Euro's trajectory.