Euro: Fiscal risks point lower against US Dollar - MUFG

Derek Halpenny at MUFG argues that widening French OAT/Bund spreads and global fixed income risk aversion are adding to negative momentum for the Euro. Political and fiscal uncertainties in France, including a large planned consolidation and budget risks, weigh on sentiment. MUFG flags 1.1340 in EUR/USD as key support, with a breach likely extending losses toward a 1.10–1.12 range.

French risks pressure EUR/USD

"Yesterday we touched on French and German political risks as factors that could serve to weigh further on EUR performance and the spotlight yesterday was certainly on France with the OAT/Bund spread widening out to 110bps, the highest level since 2012 during the euro-zone debt crisis. Has anything changed to explain this spread widening? In France specifically, no, not really."

"Global investors are selling duration, and this global backdrop is forcing a higher level of risk aversion that sees fixed income markets with the greatest risks performing worse. There was a ratings downgrade over the weekend from a smaller ratings agency – Scope – but that cut merely brought its rating in line with S&P and Fitch at A+. S&P and Fitch both confirmed a stable outlook earlier this year (May and August respectively)."

"Parliament reopened this week which may be a factor in fiscal risks returning to the fore in France and there are clear risks of problems in getting the 2027 budget passed. There is a EUR 54bn fiscal consolidation implied in the plan to bring the budget deficit down to 5.0% of GDP, down from a deficit of 5.4% this year, which was revised up from 5.0% due to weaker GDP growth."

"However this plays out over the coming weeks what is clear is that the global fixed income backdrop makes the market risks around the budget that much greater. As a result, downside risks for the euro will continue. It was notable yesterday that on a day in which the advance PMIs were stronger than expected EUR/USD continued to slide."

"The 38.2% retracement support level from the move higher in EUR/USD from the February 2025 low to the January 2026 high comes in at 1.1340 and that to us is the next key support. A test and breach of that level would likely see the move lower in EUR/USD extend into a 1.10-1.12 range."