EUR/USD rebounded after France unveiled a plan to narrow its budget deficit, tightening the spread between French and German bond yields that had weighed on the euro. German Bunds and US Treasuries kept drawing safe-haven flows, while Marine Le Pen raised her own spending-cut pledge ahead of next year's presidential vote.
EUR/USD climbed after France's government unveiled plans to sharply narrow the budget deficit by restraining spending and raising tax revenues, helping stabilize the bond market and tighten the spread between French OAT and German Bund yields. The move offered relief to the euro, which had been pressured by France's fiscal troubles.
Spread narrows as Paris moves to calm investors
The rally came as expectations for an October ECB rate hike evaporated following the surge in the French-German bond spread, pushing traders to expect the central bank to hold off for now. Eurozone core inflation ticked up to 2.5% from 2.4% the prior month, though the figure took a back seat to the bond market story.
France's 10-year OAT yield eased to 4.735%, consolidating near the multi-decade highs hit the prior week. Germany's 10-year Bund yield, meanwhile, extended its decline to 3.432%. That left the OAT-Bund spread near 140 basis points, entrenched near 2012 peaks.
Safe havens keep drawing flows away from French debt
Institutional allocators continued favoring safe-haven German Bunds and US Treasuries over French paper, even after the week's violent yield spike eased. The US 10-year Treasury yield dropped to 5.258%, while the two-year yield slid to 4.798% on expectations of a possible autumn Fed pause.
Behind the reluctance to hold French duration are structural concerns: the country's budget deficit is projected at 5.4% of GDP this year, with debt near 120% of GDP. Prime Minister Sébastien Lecornu's proposed €54 billion fiscal consolidation package still faces a difficult path through a divided parliament.
Le Pen raises her spending-cut pledge
Marine Le Pen, who leads in polls for next year's two-round presidential election, increased her proposed savings plan on Tuesday. She is now targeting €140 billion in net savings by 2032 compared with 2026, up from the €125 billion she had originally planned over a five-year presidency. According to Reuters: "we are setting the necessary adjustment at €140 billion in net savings in 2032".
Her plan would bring the deficit down to the EU's 3% limit by 2030, from 5.4% this year, and aims to eventually return debt toward 60% of economic output from 119% currently.
EUR/USD technical picture
On the daily chart, EUR/USD has been selling off heavily along a defined downward trendline. Buyers need a break higher to open the door toward the next major trendline near 1.1550, while sellers are leaning on a recent lower high at 1.1285 on the 4-hour chart to keep pushing into new lows.
Traders now turn to Thursday's FOMC meeting minutes and Friday's University of Michigan consumer sentiment survey for the next directional cue.
Sources: investingLive, Investing.com, Reuters via Investing.com
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