Euro Gains as Dollar Softens, French Fiscal Risks Weigh

Key Moments

Euro Steadies Near 1.1200 as Markets Eye US Data and Fedspeak

The EUR/USD pair recovered some ground in early Asian dealings on Thursday, edging back toward the 1.1200 level. The move came as the US Dollar softened, but the upside for the pair remained constrained by persistent concerns around France’s fiscal outlook and its implications for the broader Euro area.

Market participants awaited the latest US weekly Initial Jobless Claims figures and a series of Federal Reserve communications scheduled for later on Thursday, events that could influence expectations for US monetary policy and, in turn, Dollar direction.

France’s Fiscal Strains Fuel Sovereign Risk Concerns

French Prime Minister Sébastien Lecornu’s minority government announced a €54bn savings plan last month, aimed at averting what officials fear could be a severe sovereign downgrade or even default. Despite this effort, French government debt has remained under pressure as policymakers grapple with narrowing the budget deficit ahead of a contentious presidential election in 2027.

These fiscal issues, coupled with turbulence in Eurozone bond markets, have stoked worries over a possible sovereign debt episode within the bloc. The heightened uncertainty has weighed on expectations for additional tightening from the European Central Bank (ECB), adding to the drag on the common currency.

“It just seems to me like the market is rejecting this 2027 budget. There’s an election coming up … who’s going to vote for fiscal austerity with elections coming up?” said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull in Toronto.

Fed Minutes and Market Pricing Signal Higher-for-Longer US Rates

Minutes from the latest Federal Open Market Committee (FOMC) meeting showed that US central bank officials continued to view inflation as the primary risk to the economic outlook. The tone of the discussion signaled openness to another policy rate increase.

Fed funds futures reflected that stance, with markets assigning an implied 22% probability of a 25-basis-point hike at the Federal Reserve’s October policy meeting. That probability remained unchanged from the previous day, according to the CME Group’s FedWatch tool.

ABN Amro: Wider US-German Yield Gap Pressures Euro, But Downside Seen as Limited

Strategists at ABN Amro highlighted that increasingly negative German-US yield differentials have continued to undermine the Euro against the US Dollar. They noted that the interest rate spread between the two countries has “become more negative, which provided support to US Dollar against the Euro.” This pattern has been visible “in the two-year and ten-year nominal yield spreads, as well as in the ten-year real yield spread between Germany and the US,” with “EUR/USD moved in line with these increasingly negative spreads, as shown in the two graphs below.”

Beyond yield dynamics, ABN Amro pointed to “fiscal and political uncertainty in France” as another factor putting pressure on the Euro. The bank argued that “financial markets are pricing in too many rate increases by the Fed and the ECB.” It contrasted prevailing market expectations with its own projections, observing that “markets expect more than three additional Fed increases by 2027, compared with our forecast of only one,” and that “they also expect slightly fewer than three ECB increases by September next year, compared with our forecast of two.”

Despite the current backdrop, ABN Amro stated that it still “expect limited further EUR/USD weakness and maintain our end-2026 forecast at 1.15.” The bank added that “if market expectations move closer to our forecasts, the adjustment should put more downward pressure on the Dollar than on the Euro, helping to limit further declines in EUR/USD.”

Schmid’s Hawkish Tone Reinforces Higher-for-Longer Dollar Narrative

Recent commentary from Fed official Schmid delivered a clear hawkish message, reflected in an 8/10 score on the FXS Speechtracker, modestly above the historical average of 7.5/10. The remarks underscored a strong emphasis on inflation risks, with Schmid stressing that the labor market “remains in a good place,” expressing frustration over persistent inflation, and flagging artificial intelligence as a “largest driver” of price pressures. Schmid also pointed to the need for additional short-term rate tightening even in the face of elevated longer-term yields, signaling a priority on reestablishing policy credibility over early rate cuts.

The broader tone within the Fed was captured by the FXS Fed Sentiment Index, which rose by 0.34 points to 137.91. This level remained firmly above the neutral mark of 100 and, together with Schmid’s strong hawkish profile, suggested that markets should continue to factor in a higher-for-longer path for US interest rates and the Dollar, rather than expecting imminent policy easing.

Technical Picture: Bearish Bias Persists Despite Oversold Signals

On the daily chart, EUR/USD extended its decline below the 100-day simple moving average (SMA) and the middle line of the Bollinger Bands, preserving a clearly negative technical backdrop. Prices held just above the lower Bollinger Band, while the 14-period Relative Strength Index hovered around 23, indicating oversold conditions that could slow additional losses but did not yet point to a durable reversal as long as the pair remained capped by the overhead moving averages.

On the downside, immediate support was identified at the lower Bollinger Band near 1.1140, where some sellers might consider locking in profits if oversold readings persist. On the upside, initial resistance was seen at the Bollinger middle band around 1.1380, followed by the 100-day SMA at 1.1495 and the upper Bollinger Band close to 1.1620. A sustained move above these successive levels would be needed to alleviate the prevailing bearish pressure and shift the medium-term outlook to a more constructive stance.