The Euro (EUR) is not actively trading on the French political turmoil, but it’s likely facing some degree of restraint from it. French equities had another bad day, but what matters is OAT’s performance. The euro’s correlation with EU bond spreads to German bunds tends to be either very low most of the time or quite high for short bursts. For Italian bonds, the pain threshold was around 200bp; for French bonds, we don’t have enough history to be sure, but a break above December’s high of 90bp (currently 77bp) can trigger a significant euro reaction, ING’s FX analyst Francesco Pesole notes.
EUR/USD can ultimately make its way back to 1.170
“Such a move would suggest fiscal concerns are outweighing political instability. The latter seems largely priced into the OAT risk premium, given that politically stable Italy is trading at almost the same 10-year yield despite a BBB+ rating.”
“Markets are still making up their minds about the aftermath of the upcoming confidence vote and don’t seem in a rush to price snap elections as the baseline scenario. The alternative – this or a new government watering down spending cuts enough to gather parliamentary support and deliver some fiscal consolidation – is plausible, though admittedly a relatively narrow path given the heightened scrutiny it faces.”
“Anyway, markets appear to have absorbed the initial bad news and might stabilise ahead of the actual vote on 8 September. We think EUR/USD can hold above 1.160 and ultimately make its way back to 1.170.”
Source: https://www.fxstreet.com/news/eur-euro-proving-resilient-to-france-ing-202508270848
