Euro Slides as French Fiscal Jitters Weigh on EUR/USD

Key Moments

Euro Under Pressure Ahead of FOMC Minutes

The EUR/USD pair is trading on the back foot around 1.1250 in early Asian dealings on Wednesday, with the Euro weakening against the US Dollar as markets focus on rising concerns over France’s fiscal trajectory. Investors are also positioning for the release of the Federal Open Market Committee (FOMC) Minutes later on Wednesday, which could provide further direction for Dollar-sensitive assets.

France’s Finance Minister signaled that the government is prepared to invoke special constitutional tools to bypass Parliament in order to implement billions in spending cuts if talks over next year’s budget break down. This stance is aimed at pushing through austerity measures despite political resistance.

Doubts about France’s capacity to contain its budget deficit, combined with a sharp bond market selloff last week, have intensified fears of a possible sovereign debt crisis within the Eurozone. These developments are feeding expectations that the common currency may remain under pressure in the near term.

French and Spanish Political Risks Darken Euro Outlook

French Prime Minister Sébastien Lecornu’s minority administration laid out plans last month for a €54bn savings package designed to avoid a severe ratings downgrade or an outright sovereign default. French government bonds have come under renewed strain as policymakers battle to narrow the deficit against the backdrop of a contentious election scheduled for 2027.

The announcement of a snap election in Spain is adding another layer of uncertainty, further undermining sentiment toward the Euro.

“Europe is taking the spotlight at the start of the week, as fiscal and political concerns hit the bloc,” said Kathleen Brooks, the research director at XTB. “France is the epicentre of the concerns; however, Spain is also set to get ready for an early election, which is adding to investor worries,” Kathleen added.

Softer Fed Hike Bets Offer Limited Support to EUR/USD

On the Dollar side, easing expectations for additional US Federal Reserve rate increases following weaker US labor market data released last week are acting as a partial counterweight to Euro weakness. This shift in expectations could restrain further gains in the Greenback and provide some support to EUR/USD.

Interest-rate swaps showed traders assigning an almost 20% probability that the Fed will raise its benchmark rate at the October meeting, according to the CME FedWatch tool.

Systematic Flows Show Persistent Short Euro Bias

TD Securities notes that its current “CTA Positioning, EUR Futures” signals that systematic participants maintain a substantial short stance in the Euro across multiple market environments. The firm’s “CTA positioning est., EUR, downtape” differs from its “CTA positioning est., EUR, flat tape” and “CTA positioning est., EUR, uptape,” illustrating how exposure is adjusted depending on the underlying price trend.

The “CTA positioning est., EUR, big uptape” framework highlights how positions could shift more aggressively if Euro appreciation gains momentum. TD Securities’ “CTA Positioning Estimate (rhs) EUR Futures” aggregates these scenarios, outlining how CTA exposure in EUR futures may transition as conditions move from downside to more constructive tapes.

Fed’s Schmid Strikes Hawkish Tone on Inflation and AI

Fed’s Schmid delivered remarks that were interpreted as firmly hawkish, recording an 8/10 FXS Speechtracker score, slightly above the 7.5/10 historical average and signaling heightened concern over persistent inflation.

The speech stressed that inflation is “frustrating” and must be addressed, and emphasized that AI is now viewed as one of the largest contributors to inflation. Schmid indicated that the Fed still has work to do on short-term rates even as longer-dated yields have already moved higher, reinforcing the inclination to maintain restrictive policy for an extended period. The warning that the Fed’s credibility hinges on defeating inflation further strengthens the hawkish message and suggests limited scope for near-term easing across Dollar-sensitive markets.

The FXS Fed Sentiment Index increased by 0.34 points to 137.91, solidly in hawkish territory and well above the neutral 100 mark, aligning with the elevated FXS Speechtracker reading. This uptick confirms that recent Fed commentary, including Schmid’s, is being read as supporting a higher-for-longer policy stance that is likely to keep the Dollar supported against lower-yielding currencies.

Technical Picture: EUR/USD Bias Stays Bearish Despite Oversold Signals

From a technical standpoint, EUR/USD continues to display a bearish short-term configuration on the daily chart. Spot remains below both the 20-period simple moving average of the Bollinger Bands and the 100-day simple moving average (SMA), keeping the broader recovery attempts capped even after a modest bounce from the lower Bollinger band.

The Relative Strength Index (14) stands at 26.08, indicating oversold conditions. This suggests that while downward momentum is still dominant, the pair may be more vulnerable to corrective rebounds than to a new, aggressive leg lower at current levels.

On the upside, initial resistance is seen at the Bollinger Bands middle line at 1.1405, with the 100-day SMA at 1.1500 forming a wider supply region before the upper Bollinger band near 1.1640. On the downside, the lower Bollinger band at 1.1168 acts as first-line support. A decisive move below that threshold would point to additional downside risk, whereas sustained trading above it would allow for consolidation beneath the stacked moving-average resistance levels overhead.