Euro Holds Above 1.12 Amid French Risks, Fed Outlook

Key Moments

Euro Inches Higher Despite French Political and Fiscal Turbulence

EUR/USD is trading with a slight positive bias near 1.1235 in the early Asian session on Thursday. The pair is holding modest gains, though further upside appears constrained by intensifying political and fiscal tensions in France. Market participants are also awaiting remarks from European Central Bank (ECB) policymaker Fabio Panetta later in the day.

French sovereign borrowing costs have moved sharply higher, with the yield on the 10-year obligation assimilables du Trésor (OAT) rising more than 8 basis points to 5% on Wednesday, a level not seen in 24 years, before slipping back to 4.99%. The move reflects mounting unease over France’s fiscal trajectory and domestic unrest.

Financial markets have been rattled by the government’s inability to finalize a long-delayed budget, alongside widespread anti-government protests. These developments are clouding the near-term outlook for the common currency. French President Emmanuel Macron pledged to avert a repeat of last weekend’s riots and looting, as the Yellow Vest movement filed plans for a large march in Paris on Saturday that is expected to pose a major challenge for the administration.

“The French debt situation isn’t tractable. They do need to go in and make proper adjustments on the fiscal side to get this debt level down to at least show the seriousness around the trajectory,” said John Hardy, global head of macro strategy at Saxo in Copenhagen.

Rate Expectations: Limited Fed Hike Probability Near Term

In US markets, Fed funds futures indicate that traders are assigning only a small probability to a Federal Reserve rate increase at next week’s meeting. According to the CME FedWatch tool, the next potential move higher in policy rates is expected in December. Fed Chairman Kevin Warsh is also seen as unlikely to provide explicit guidance on future rate adjustments in the immediate term.

Euro’s Usual Links to Energy and Bonds Weaken

Analysts at Societe Generale observe that EUR/USD has displayed unexpected resilience. They note that “for EUR/USD, it’s curious that cycle highs in nat gas prices and bond jitters have not triggered another leg down in a way that would have occurred prior to October.”

The bank’s analysts point out that “the correlations have broken down over the past two weeks or so,” as the conventional relationships between EUR/USD, energy prices, and bond yields no longer match earlier patterns in the current cycle. They argue that this behavior “would suggest that most of the bad news is priced in or investors are not committed to putting on new directional trades, playing the ranges instead.”

Fed Communication: Warsh Balances Optimism With Crisis Scars

Fed Chair Warsh delivered a message that combined moderate optimism with caution. The FXS Speechtracker score for his latest appearance came in at 5.6/10, slightly below the usual baseline of 6.1/10, pointing to a somewhat less forceful tone.

Warsh acknowledged being “over-scarred from the Global Financial Crisis,” underlining an enduring bias toward risk aversion. At the same time, he highlighted structural growth dynamics and an investment upswing supported by “good policies,” while emphasizing that the upcoming October and December meetings will be the “crystalizing moment” for key decisions on output, employment, and inflation.

His comments also emphasized artificial intelligence as a near-term demand driver with uncertain implications for employment. Warsh’s remarks on plans for a field hearing and new Fed task forces indicate an effort to capture the benefits of technological progress while addressing potential downside risks and safeguarding financial stability.

Despite the slightly softer tone, the FXS Fed Sentiment Index was unchanged, moving 0.00 points to stay at a hawkish 127.51, comfortably above the neutral 100 mark. This combination suggests that markets are likely to interpret Warsh’s message as consistent with a framework that maintains a high threshold for easing, balancing optimism about investment and AI-related productivity against crisis-era caution and a firm focus on inflation and tail risks.

EUR/USD Technical Picture: Bearish Bias Under Key Moving Average

On the daily chart, EUR/USD continues to exhibit a bearish short-term bias. The pair remains below the 100-day simple moving average (SMA) and under the middle line of the Bollinger Bands, with price action consolidating in the lower half of the recent volatility band. The 14-day Relative Strength Index (RSI) is hovering around 41, below the neutral 50 threshold, indicating that selling pressure still dominates over recovery attempts.

On the upside, the first notable resistance level is the Bollinger middle band near 1.1245. A break above that zone would expose the upper Bollinger band around 1.1370, ahead of the more decisive barrier at the 100-day SMA at 1.1455. On the downside, the next important support area is located at the lower Bollinger band near 1.1120. A clear move below that level would signal scope for an extension of the broader downtrend.

Euro Basics: Key Drivers and Market Role

What is the Euro?

The Euro is the common currency used by 20 European Union member states that form the Eurozone. It is the second most actively traded currency globally after the US Dollar. In 2022, it accounted for 31% of all foreign exchange trades, with an average daily turnover exceeding $2.2 trillion.

The EUR/USD pair is the most traded currency cross worldwide, representing an estimated 30% of all FX transactions. Other heavily traded Euro pairs include EUR/JPY at 4%, EUR/GBP at 3%, and EUR/AUD at 2%.

Role of the ECB in Shaping the Euro

The European Central Bank (ECB), headquartered in Frankfurt, Germany, serves as the central bank for the Eurozone. It sets interest rates and conducts monetary policy with the primary objective of maintaining price stability, which can involve containing inflation or supporting growth.

The ECB’s main policy lever is interest rates. Higher rates – or expectations of higher rates – generally support the Euro, while lower rates tend to weigh on the currency. Monetary policy decisions are taken by the ECB Governing Council at eight scheduled meetings each year. The Council consists of the heads of the Eurozone national central banks and six permanent members, including ECB President Christine Lagarde.

Impact of Inflation Data on the Euro

Eurozone inflation is tracked using the Harmonized Index of Consumer Prices (HICP). When inflation rises more than anticipated, particularly if it exceeds the ECB’s 2% target, the central bank is pushed toward raising interest rates to restore price stability.

Comparatively higher interest rates versus other economies typically bolster the Euro by making Eurozone assets more attractive to international investors.