EUR/CHF hits three-month low as French bond market turmoil stokes euro fears

The euro may not be showing it clearly, but it is in a tricky position during trading today. EUR/USD is managing to stay somewhat steady despite the wider market disruption, yet EUR/CHF appears to reveal a more concerning picture regarding the dangers emerging in Europe.

The most recent decline has brought the currency pair to its lowest point in three months, dipping to 0.9220 as the Swiss franc gains strength from its status as a traditional safe haven. What lies behind this move?

The answer relates to a topic that has frequently come up over the last fortnight: France's fiscal difficulties. Those concerns are escalating rapidly, with French 10-year government bond yields now above 5% for the first time since 2002.

Furthermore, the yield gap between French and German 10-year bonds is expanding toward roughly 170 basis points, the widest level recorded since 2011. Not long ago, the threshold of 150 bps was being watched closely. Now the spread sits nearly 20 bps above that marker. This latest increase signals that investors are seeking a much greater premium for holding French sovereign debt amid rising fiscal and political uncertainty.

Looking at the EUR/CHF chart, those worries are beginning to show up in price movements. France is the second-largest economy in Europe, and any problems there could spill over into broader European assets and the euro itself.

The pair has already moved below its trendline support drawn from the March and May lows, and subsequently lost the critical 0.9300 mark after the 100-day moving average, shown in red, also broke down. The ongoing decline is now testing the 200-day moving average, indicated by the blue line, situated around 0.9235.

If that level is decisively breached, a further drop toward 0.9200 could happen first, with some potential support from the June-to-July lows near 0.9180. After that, the next significant downside target is closer to 0.9100.

On the Swiss franc side, the Swiss National Bank recently softened its language regarding currency intervention. The central bank suggested less urgency in countering franc strength. However, with European risks intensifying and EUR/CHF approaching a potentially major technical breakdown, policymakers may need to reassess their position.

For the moment, though, the EUR/CHF chart offers little reassurance for the euro, as it arguably serves as the best gauge of the risks surrounding European bond markets.