EUR/USD is consolidating at its lows as French fiscal worries keep the US dollar supported. Traders now turn to Wednesday's US CPI report, which could revive a Fed rate hike in October, and to France's budget plan.
The US dollar has been supported recently despite a dovish repricing after comments from Fed officials Williams and Jefferson that pushed back against expectations of an October rate hike. The main reason was risk-off flows into the greenback because of European debt concerns.
France's deficit pushes bond spreads wider
Political uncertainty and worries over France's large fiscal deficit pushed French government bond yields higher. The spread over German Bunds widened to its highest level since the eurozone debt crisis.
However, France's government proposed a 2027 budget targeting a deficit of 5.0% of GDP, down from the previous 5.4%, and the plan helped ease market concerns somewhat. The plan still faces parliamentary hurdles, and Eurozone finance ministers and the ECB have urged France to pass a credible budget.
US CPI could swing the dollar
A hotter than expected core CPI could bring an October rate hike back on the table and give the dollar a boost. A soft report, on the other hand, will likely weigh on the greenback in the short term as Treasury yields fall.
On the euro side, the probabilities of an ECB rate hike in October have faded after the sharp widening of the French-German spread. Markets still expect the ECB to raise rates in December. The latest Eurozone CPI showed headline inflation at 3.8% in September from 3.2% in August, largely because of higher energy prices. Core inflation edged up to 2.5% from 2.4%.
Key levels on the EUR/USD chart
On the daily chart, EUR/USD has been selling off heavily in the past weeks on France's debt woes. The nearest key support sits around 1.1067, while sellers want a break lower to target the 1.08 handle.
On the 4 hour chart, buyers would look for a break of the downward trendline, with 1.1285 as the first target. The US CPI report arrives on Wednesday, and the US PPI, Retail Sales and Jobless Claims figures follow on Thursday.
Source: investingLive
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