The euro is trading close to a 17-month low after France's budget plan failed to calm a sovereign bond sell-off. Investor concern over the country's debt load has pushed the France-Germany bond yield spread to its widest since 2012, as the euro also slides.
Euro falls as France-Germany spread widens
The euro fell by over 0.75% to as low as €1.1214 yesterday, its weakest level in 17 months. Ipek Ozkardeskaya, senior analyst at Swissquote, says jitters over French debt are behind the move: According to The Guardian: "The EURUSD tanked to 1.1215 yesterday".
The sell-off tracks a sharper move in government bonds. The gap between French and German borrowing costs widened to its widest level since 2012, and French 10-year bond yields briefly jumped to their highest level since 2002 before dipping back. Deutsche Bank strategist Jim Reid notes the Franco-German 10-year spread widened by 13.9 basis points in a single day, its biggest jump since March 2020.
Budget plan fails to reassure bondholders
Paris tried to calm markets by proposing a budget for next year that includes €43bn in cuts and tax rises, raising the tax burden while slowing spending growth through cuts to state outlays and caps on pension and civil servant pay rises. Finance minister Roland Lescure framed the plan as necessary to put France back on a path toward deficit reduction.
Even so, the budget deficit would only fall to 5% of GDP next year. Analysts at ING warn that level is too high to stop France's national debt, already at 119% of GDP, from climbing further. ING added that the package would keep the deficit from reaching 6.5% of GDP but would not stabilize public debt.
What comes next for the euro
Two releases could move EUR/USD further. The eurozone's flash inflation reading for September lands at 10am BST, followed by the US non-farm payrolls report at 1:30pm BST, which comes as pressure mounts on the Federal Reserve over interest rates. Political uncertainty ahead of France's 2027 presidential election keeps investors cautious about French debt.
Source: Business | The Guardian
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