FX Daily: Tipping point
The desk argues that the recent sell-off in French debt represents a pivotal moment for global markets, challenging the prevailing narrative of continually rising short-term interest rates. Per the full note, this shift raises questions about the ECB's tightening path, particularly in relation to the Fed, suggesting that EUR/USD could remain under pressure due to heightened French risk premiums. Current positioning signals a general expectation that the Fed may delay further hikes, as indicated by a drop in October rate hike probabilities from 70% to just 28%. Meanwhile, our current consensus for EUR/USD sits at 1.1700, suggesting a potential divergence with trading levels around 1.1446.
What the desk is arguing
The desk maintains that the deterioration in French bond markets has potentially broken the cycle of ever-increasing interest rates, specifically impacting perceptions around ECB policy. As central banks reassess their trajectories, the implications for EUR/USD are significant, especially as the market now expects less aggressive ECB action compared to the Fed.
The sell-off in short-dated US interest rates marked the first substantial decline since late August, implying shifting investor sentiment regarding the need for additional rate hikes. With market expectations adjusting and consensus pointing to less urgency for the ECB, the outlook remains bearish for EUR/USD, particularly as the risk premium associated with French debt weighs down the euro.
Where it sits in our coverage
Our current consensus target for EUR/USD is 1.1700, with a range from 1.1200 to 1.2000 across different firms. Notable targets for December 2026 include:
- socgen: 1.1400
- rbc: 1.2000
- commerzbank: 1.2200
This view aligns with the upper end of potential forecasts, with most projections hovering around the 1.1700 mark.
How other firms see it
Several firms have aligned views, expecting a continued bearish trend for the euro amid uncertainties surrounding ECB measures. Firms like investec and stanchart see similar non-aggressive rate hikes impacting EUR positions.
Conversely, firms like lloyds and bofa offer more pessimistic targets, highlighting differing expectations on the future movement of EUR against the USD and other pairs impacted by central bank policies.
As the situation unfolds, monitoring the intersection of ECB tightening with French bond yields will be critical, especially since evolving perceptions can affect broader market dynamics, including crossover pairs like EUR/CHF.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The sell-off in French debt has disrupted expectations for ECB tightening, signaling potential shifts in market dynamics.
- 02Current positioning reflects a bearish sentiment for EUR/USD with risks associated with French debt.
- 03The dollar's trajectory is being evaluated against a backdrop of delayed Fed hikes, affecting cross-currency valuations.
Market implications
Watch for EUR/USD movements around 1.1400. This is a critical support level as market positioning aligns with an adverse reaction to ECB tightening measures. The release of U.S. non-farm payroll data could also serve as a catalyst for volatility, influencing investor sentiment.
Risks to this view
A failure to see the anticipated drop in U.S. payrolls could cement the dollar's position, leading to a rebound in short-term interest rates contrary to current expectations. Additionally, any sudden stabilizing action by the ECB amidst rising French yields could reverse bearish outlooks for the euro.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
Danske Bank | Bearish | 1.1100 |
UBS | Bullish | 1.1800 |
Articles FX Daily: Tipping point Published 07:40 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Markets reached a point of inflection yesterday, where the sell-off in French debt broke the narrative of ever-higher short-term market interest rates. This questions whether central banks are about to extend into policy error territory with tightening cycles. If that is the case, the ECB has less cause to tighten than the Fed, and EUR/USD can stay offered Chris Turner , Frantisek Taborsky , Francesco Pesole and Dmitry Dolgin EUR/USD is expected to stay offered as markets price in French risk premium and rethink ECB tightening USD: Pricing of Fed cycle looks stickier than most A big day in FX markets yesterday saw the sell-off in French government debt dominate global markets.
And it was the first time since late August that short-dated US interest rates had a sizeable fall. Here investors have started to reassess whether central banks – more so the European Central Bank than the Federal Reserve – need to deliver another 75bp of tightening to subdue inflation. We discuss the ECB and the euro below.
Perhaps adding to the correction lower in US rates were comments from Fed Vice Chair Philip Jefferson echoing remarks from John Williams earlier in the week that the Fed should not rush into back-to-back rate hikes. Pricing for a Fed hike in October has now dropped to just 28% from 70% a week ago, and it looks like the market is going to settle into the view that the next hike comes in December. Feeding into the Fed story will be today's release of the September non-farm payroll figure.
Consensus expects around an +85/90k headline gain, an unemployment rate remaining low at 4.1% and a healthy average earnings figure near 3.1% year-on-year. Given very low growth in the US labour force, we doubt a downside disappointment in the headline number will weigh heavily on US rates or the dollar. With energy prices remaining at their highs and the US activity story resilient, it looks like the dollar can largely hold gains if not extend a little higher – especially against the euro.
DXY broke to a new high for the year above 101.80 yesterday and looks biased to head up to the 102.85 area. Chris Turner EUR: Most roads lead to a weaker EUR/USD EUR/USD decisively broke to new lows for the year yesterday as the sell-off in French debt finally came home to roost. Little prospect of fiscal consolidation anytime soon leaves French debt vulnerable over the coming months, and yesterday dramatically questioned whether the ECB could push ahead with another 75bp of tightening during a very difficult time for European government bond markets.
In particular, the central bank must be worried about the contagion of the French sell-off into the likes of Italy and even Spain. Investors assume that any ECB fix to the bond market sell-off either involves much less or no tightening of policy (euro bearish) or, in extremis, the use of the Transmission Protection Instrument to buy bonds (very euro bearish). My colleague, Francesco Pesole, wrote a nice article on how the market could easily add another 2% in risk premium to the euro if this bond market sell-off extends.
Sources & References
How we cover this story
Related news on this pair
EUR/USD Price Forecast: Next move hinges on US NFP data
EUR/USD Elliott Wave: New yearly low opens the door for further downside [Video]
Break below yearly lows in EUR/USD suggests Elliott Wave formation with scope for additional downside momentum.
Euro: French spread widening threatens EUR/USD range – ING
Widening French bond spreads undermine EUR/USD support levels and risk triggering range break to the downside if fiscal concerns accelerate.