Euro under pressure from US Dollar recovery and French debt concerns

• Three-week lows give way to a US Dollar recovery, erasing earlier EUR/USD gains.
• Wider bond yield spreads and concerns over France's public finances keep the Euro under pressure.
• Ahead of Fed and ECB policy decisions, subdued Eurozone Consumer Confidence puts further pressure on the currency.

EUR/USD is down 0.33% on Thursday. Earlier gains have evaporated as the US Dollar (USD) recovers from a three-week low reached during Asian trading. France's political instability and uncertain fiscal outlook also remain a drag on the Euro (EUR). The pair stands near 1.1195 at the time of writing, down from its intraday peak of 1.1256.

France's benchmark 10-year government bond yield has climbed above 5% for the first time since 2002, increasing its spread over German government bond yields. Investors are pulling back from French sovereign debt amid street protests and lingering doubts about the country's ability to restore its public finances.

Bond markets increasingly reflect France's fiscal difficulties, according to strategists at Brown Brothers Harriman. They point to the “French 10-year bond yield premium over Germany … up over 100bps since late February to 175bps, closing in on its 2011 record high of around 190bps.” Using “Italy’s 2018 budget crisis is any guide” as their conditional reference, they argue that the spread “can widen to about 250bps and drag EUR/USD down to 1.1000.”

For a potential longer-term catalyst, BBH says that “France’s 2027 presidential election could offer a similar turning point, but only if it produces a government able to deliver credible deficit reduction.” In the absence of that shift, the strategists warn that “French spreads remain vulnerable to further widening, keeping EUR/USD under pressure.”

A weaker preliminary Eurozone Consumer Confidence reading has compounded the Euro's difficulties. The indicator fell to -17.9 in October, missing the -17 forecast and declining from -16.5 previously.

The Greenback is recovering despite a further retreat in US Treasury yields from multi-year peaks. Concerns about AI-related investments are weighing on global equities and boosting demand for government bonds, driving the yield correction. The benchmark 10-year US Treasury yield is near 5.06%, compared with a high of 5.36% earlier this month.

After hitting an intraday trough of 101.45, the US Dollar Index (DXY) is trading near 101.85. The index measures the Greenback against a basket of six major currencies.

For their October meetings, traders broadly anticipate unchanged interest rates from both the Federal Reserve (Fed) and the European Central Bank (ECB). Further increases before year-end nevertheless remain expected. Energy-related inflation risks arising from Middle East tensions threaten to hold inflation above each central bank's 2% target.

Reports that the US and Israel are weighing renewed strikes against Iran after the US midterm elections have lifted oil prices to five-week highs. Ongoing Houthi attacks in Saudi Arabia are also increasing supply risks throughout the Gulf region.