The euro is sliding as French political gridlock blocks budget-cutting measures and widens the gap between French and German bond yields. The US dollar has climbed to its highest level since late July, helped by a firm economy and expectations of further Fed rate hikes.
France's public finances are pushing the euro lower. Public debt could exceed 120% of GDP as early as 2027, while the cost of servicing that debt is set to double by the end of the decade. The National Assembly remains categorically opposed to the budget-cutting measures needed to address this, so investors are fleeing the country.
French-German yield spread widens
As a result, the yield spread between French and German bonds has widened beyond levels seen during the European debt crisis. Back then, it took Mario Draghi's pledge to preserve the euro, and it looks as though the central bank may once again have to resort to buying up debt securities. That prospect is putting serious pressure on EUR/USD.
Dollar gains on Fed rate-hike bets
The dollar has risen more than 2% over the last seven trading sessions, reaching its highest level since late July. Beyond a strong domestic economy and momentum in big tech, FOMC members have flagged concerns that the prolonged Middle East conflict and high energy prices will push up core inflation through second-round effects, reinforcing the case for continued tightening.
Futures markets now price a 54% probability of a rate rise in October, with the probability of two further rate rises in 2026 standing at around 40%.
Source: ActionForex
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