French Debt Risk Threatens Euro Stability

ING's Chris Turner is sounding an alarm about the French OAT-Bund spread widening to +127bp, which he believes could add a risk premium to the euro and constrain the European Central Bank's (ECB) tightening cycle.

The EUR/USD pair has been driven to its yearly lows mainly by a hawkish reassessment of Federal Reserve policy, according to Turner. However, he warns that French debt risk is not being priced into the euro.

If the OAT-Bund spread continues to widen and US data remains strong, Turner predicts a potential drop in the EUR/USD pair to the 1.11-12 area.