EUR: French risk finally reaches the euro
The euro remains under heavy pressure, with EUR/USD sliding to its lowest level since May 2025 as investors increasingly focus on political and fiscal risks within the eurozone. While elevated energy prices, tighter financial conditions and a hawkish Fed continue to support the dollar, the latest leg lower has been driven by concerns much closer to home.
Attention has shifted to France, where the government’s 2027 budget proposals have reignited concerns over fiscal sustainability. The French-German 10-year yield spread is widening towards 150bps, its largest since 2012, raising fears that pressure in sovereign bond markets is beginning to spill over into the currency itself. Similar episodes have historically weighed on the euro, particularly when investors start questioning fiscal cohesion within the bloc.
The FX market is already reflecting this shift. EUR/CHF suffered its biggest daily decline in a year, a classic sign that investors are using the Swiss franc to hedge growing eurozone fiscal risk. Meanwhile, options markets show rising demand for downside euro protection, both in the near term and through next year’s European election cycle.
The challenge for the euro is that these political concerns are emerging just as EUR/USD is already grappling with wider rate differentials, higher energy costs and stronger demand for dollars. With fresh bearish positioning building, the balance of risks remains skewed lower despite the ECB’s hawkish stance and the eurozone’s relatively resilient economic performance.
The broader risk-off backdrop is also prompting markets to reassess how much further the ECB can realistically tighten. Expectations have moderated from as many as four rate hikes over the next 12 months to closer to three.
Zooming out on a weekly chart, the 200-week moving average located just under 1.11 could come into focus if fiscal woes don’t abate.
USD: Safe haven and high yielding
The US dollar remains close to its strongest levels in well over a year, supported by a backdrop of surging bond yields, firm US economic activity and a hawkish Fed. While inflation pressures have shown signs of moderating, markets continue to focus on the broader reflationary forces keeping rates elevated.
The latest data offered a mixed picture. ISM manufacturing softened marginally to 54.5, but the details were firmer, with the prices-paid component jumping to its highest level since May. Meanwhile, jobless claims fell to 197k and continuing claims dropped to their lowest level since March 2023, reinforcing the view that the labour market remains resilient despite signs of cooling elsewhere.
Bond markets continue to tell the bigger story. Ten-year Treasury yields briefly touched 5.34%, their highest level since 2002, before pulling back modestly. Elevated energy prices, heavy government and corporate issuance, strong AI-related investment and renewed fiscal concerns are all contributing to higher term premia.
For the dollar, the implications remain broadly supportive. Markets have pared October hike expectations to around 27%, yet yields remain elevated and a largely hawkish roster of Fed speakers continues to emphasise inflation risks. That leaves the greenback benefiting from both yield support and safe-haven demand as investors navigate an increasingly challenging environment for risk assets.
Attention now turns to Friday’s payrolls report. A strong reading would reinforce the higher-for-longer narrative, while a softer outcome could trigger a further repricing of Fed expectations. For now, the path of least resistance for the dollar remains higher.
GBP: Best of a bad European bunch?
Sterling has enjoyed a relatively constructive week, particularly when viewed against European peers. GBP/EUR is on track for one of its strongest weekly performances in over a year, climbing back above 1.17 amid renewed concerns over French public finances and widening spreads within the eurozone. In relative terms, the UK’s fiscal challenges have simply been overshadowed by those elsewhere.
That is notable given the backdrop. Prime Minister Burnham’s conference speech contained a series of ambitious spending commitments and long-term structural reforms that might normally have unsettled gilt markets. Instead, investors largely focused on two mitigating factors: the pledge to phase reforms in gradually over a decade and the continued emphasis on fiscal discipline. As a result, the market reaction was remarkably muted.
That does not mean the fiscal story has disappeared. Thirty-year gilt yields touched 6% this week for the first time since 1998, while the 10-year yield moved above 5.5%, its highest level since 2007. Yet sterling has remained resilient, helped by the fact that UK yields still offer an attractive premium over many developed-market peers. In a low-volatility environment, those carry dynamics continue to attract support.
Against the dollar, the story is tougher. GBP/USD briefly fell below 1.32 on Thursday, reflecting the fact that the greenback currently offers the best of both worlds: attractive yields and safe-haven status. While sterling still benefits from carry demand, the dollar’s combination of income and protection remains a formidable competitor, leaving cable far more vulnerable than other GBP crosses to bouts of higher volatility or risk aversion.
Buckle up for US jobs report today. Overnight implied volatility suggests it could be a volatile one.
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
