FX Daily: French risk keeps harming ECB hawks
The desk interprets current euro weakness as a reflection of ongoing French fiscal uncertainties, which are undermining ECB hawkish expectations. Per the full note from ing, the euro faces a downside risk for EUR/USD, primarily influenced by volatility in French bonds. With the euro currently trading at 1.1253, further scrutiny on the ECB's rate adjustments is crucial, particularly amid an October CPI release that could influence expectations for US Federal Reserve policy. As we approach these data points, the potential for additional downward pressure on the euro remains notable.
What the desk is arguing
The current strength of the dollar juxtaposed with the euro's weakness reflects market concerns regarding the ECB's capacity to maintain a hawkish stance in light of external pressures, particularly from French fiscal developments. Per the full note from ing, this has contributed to an unwind of previous rate hike expectations, jeopardizing the euro's stability.
The recent ISM services index, which recorded a slight dip to 54.9, still signals expansion, suggesting that solid domestic data may buffer the greenback against broader market uncertainties. Market sentiment remains poised for a December rate hike from the Fed as per consensus, reinforcing the dollar's supportive environment amidst European turbulence.
Where it sits in our coverage
Our internal consensus target for EUR/USD is 1.1634 with a range spanning from 1.1200 to 1.2000. Noteworthy forecasts include socgen with a December target of 1.1400 and rabobank projecting 1.1759 for the same tenor.
This viewpoint aligns closely with the lower end of the broader cross-firm consensus. Several firms anticipate a more resilient euro against this backdrop, but the desk's current positioning suggests a more guarded view in light of the risks identified.
How other firms see it
Firms like hsbc and socgen exhibit alignment with potential euro weakness amid similar concerns over ECB policy. Conversely, cibc projects a more optimistic meter, anticipating the euro to trade at 1.2200 in the same period.
The evolving dynamics of EUR/USD will be heavily influenced by the outcome of upcoming central bank decisions, especially developments from the ECB and Fed. Market participants should remain vigilant about the interconnectedness of ECB policy adjustments and the broader implications for the USD strength.
What the calendar says
We currently have no high-impact events scheduled on the calendar for the next 30 days, indicating a gap that may create volatility driven by external risk factors rather than scheduled data releases.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Euro remains under pressure due to waning ECB hawkish expectations amid French fiscal uncertainty.
- 02DXY finds support from robust domestic data despite isolated euro weakness.
- 03Upcoming US CPI release could sway market expectations regarding the Fed's December rate hike.
- 04Cross-firm consensus indicates a divergence in forecast targets for EUR/USD amid ongoing volatility.
Market implications
Traders should watch for movement around 1.1200 as a psychological support level for EUR/USD, while monitoring the upcoming US core CPI release on October 14, which is pivotal for Fed sentiment. Additionally, exposure to French bond developments remains critical, as volatility in this market could influence euro trading dynamics.
Risks to this view
A significant improvement in fiscal stability within France or clearer communication from the ECB regarding interest rates could bolster the euro, reversing the current bearish sentiment. Furthermore, a major upside surprise in US inflation data could alter the current Fed narrative, impacting dollar strength against other currencies.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bullish | 1.1800 |
Citi | Bearish | 1.0850 |
Crédit Agricole | Bearish | 1.1300 |
Articles FX Daily: French risk keeps harming ECB hawks Published 07:45 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Alongside a direct – albeit so far relatively contained – build-up of fiscal premium, the euro continues to suffer from an unwinding of ECB rate hike expectations due to French bond turbulence. Risks remain firmly on the downside for EUR/USD. Elsewhere, markets will seek clarity on a November hike from Bank of England speakers this week Francesco Pesole , Frantisek Taborsky and Chris Turner Markets are awaiting details from Marine Le Pen on a counter-budget USD: Staying supported The dollar has continued to find support at the start of this week.
The euro’s idiosyncratic weakness is still playing a role, and so are global bond yields that keep pushing higher. Strong equity performance likely capped USD gains and allowed some high-beta currencies to outperform, but the domestic backdrop remains constructive for the greenback. Yesterday, the ISM services index eased to 54.9 from 55.4 (consensus 55.0), but remained firmly in expansion territory.
Business activity and new orders softened, though stronger employment and order backlogs, alongside a fresh high in prices paid, helped offset the decline. Overall, slightly hawkish news if anything (especially on jobs and prices), but not enough to materially alter the Fed narrative. Markets are likely to remain comfortable with an October hold provided September core CPI (released on 14 October) prints at 0.2% MoM, which is where consensus is converging.
But a hike in December remains the base case, also for our macro team. Today’s calendar is lighter, with only trade data and weekly ADP payrolls. There are a few Fed speakers to watch: Williams, Musalem, Bowman and Schmid.
For DXY, developments in the French bond market may matter more than domestic US factors this week. Risks remain skewed to the upside, although the Fed story may not change materially over the next few days given the light calendar. Tomorrow’s FOMC minutes may have a relatively contained impact given the soft-ish US data of the past couple of weeks.
Francesco Pesole EUR: 1.110 remains in sight The euro started the week at the bottom of the G10 scorecard, a clear signal that turbulence in the French bond market remains firmly on FX investors’ radars. The euro is being affected through two channels: a direct one, where a fiscal risk premium (so far not extreme) has been added, and an indirect one via a repricing lower in ECB rate expectations. Pricing for the March ECB meeting has declined from 80bp on 24 September to 45bp now.
Sources & References
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