French Budget Risks Pressure EUR/USD Amid Global Fixed Income Risk Aversion

Derek Halpenny at MUFG believes that widening French OAT/Bund spreads and global fixed income risk aversion are contributing to negative momentum for the Euro. The European currency is facing headwinds due to political and fiscal uncertainties in France, including a large planned consolidation and budget risks. These concerns weigh on sentiment and may push EUR/USD lower.

The French OAT/Bund spread has widened to 110bps, its highest level since 2012 during the euro-zone debt crisis. Global investors are selling duration, forcing a higher level of risk aversion that sees fixed income markets with the greatest risks performing worse. This backdrop makes the market risks around France's budget more significant.

The 2027 budget plan in France implies a EUR 54bn fiscal consolidation to bring the budget deficit down to 5.0% of GDP, from a revised deficit of 5.4% this year. Parliament has reopened, and there are clear risks of problems in getting the budget passed. The global fixed income backdrop makes these risks even greater.

As a result, downside risks for the euro will continue. Halpenny notes that the next key support level for EUR/USD is 1.1340, a 38.2% retracement support level from the move higher in EUR/USD from the February 2025 low to the January 2026 high. A test and breach of this level would likely see the move lower in EUR/USD extend into a 1.10-1.12 range.