Euro climbs as France unveils deficit-cutting measures, OAT-Bund spread narrows

FUNDAMENTAL OVERVIEW

USD:

The US dollar has found support in recent trading, even as dovish signals from Fed officials Williams and Jefferson dampened expectations for an October rate hike.

Risk-off flows into the greenback, driven by worries over European debt, have been the primary factor. France has been a focus, with political instability and concerns about its large budget shortfall pushing French government bond yields up and widening the spread over German Bunds to levels not seen since the eurozone debt crisis.

A recovery in French spreads could reduce the euro's risk premium and lead to a decline in the US dollar. Conversely, further spread widening and contagion to other nations would likely keep the greenback supported.

Additionally, US-Iran talks remain deadlocked. With a sparse economic calendar this week, market attention is expected to stay on Middle East developments and French bonds.

A diplomatic breakthrough would weaken the US dollar, as aggressive rate hike bets would probably be scaled back. An escalation of tensions, however, would likely push the greenback to new highs.

EUR:

On the euro front, the likelihood of an October rate hike vanished after the surge in the French-German bond spread. Traders anticipate the ECB refraining from raising rates to avoid further market disruption.

On the data side, the latest Eurozone CPI showed headline inflation rising further, mainly due to energy costs, while core inflation remained subdued, edging up to 2.5% from 2.4% the prior month.

Energy prices have softened somewhat recently, and the Middle East situation has improved slightly as US and Iran continue negotiations without fresh attacks. Going forward, the euro is likely to be more responsive to bond market movements, keeping traders focused on that area.

There have been some initial encouraging signals, as France's government announced plans to significantly reduce the budget deficit through spending restraint and tax hikes. This has temporarily stabilised the bond market, leading to a tighter OAT-Bund spread and a euro rebound.

EURUSD TECHNICAL ANALYSIS – DAILY TIMEFRAME

On the daily chart, EURUSD has experienced a sharp sell-off over recent weeks. A downward trendline characterises the bearish momentum. Should a pullback occur, sellers are expected to use the trendline as resistance, with risk above it, to push prices to new lows. Buyers, meanwhile, will seek a breakout higher to fuel a rally toward the next major trendline near the 1.1550 level.

EURUSD TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

On the 4-hour chart, the most recent lower high at 1.1285 could serve as resistance. Sellers are likely to step in around the trendline and the lower high to drive prices to new lows, while buyers need a break above to pave the way for new highs and a potential reversal of the recent trend.

EURUSD TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

On the 1-hour chart, a minor upward trendline defines the current pullback. If the price retraces to the trendline, buyers are expected to defend it, with risk below, aiming for a break above the downward trendline. Sellers, conversely, will look for a move lower to boost bearish bets toward new lows. The red lines indicate the average daily range for today.

UPCOMING CATALYSTS

Tomorrow features the FOMC meeting minutes. On Thursday, the latest US Jobless Claims data are due. On Friday, the week concludes with the University of Michigan Consumer Sentiment survey.