The Euro sells off hard as the French-German bond gap widens

• EUR/USD sells off hard to its lowest since May 2025 as the French-German bond gap widens.
• France pays 130 basis points over Germany for ten-year debt, the most since 2012.
• Two ECB hikes this year take the deposit rate to 2.50%.

France unveiled a 2027 budget on Thursday aimed at reassuring the investors who lend it money, and EUR/USD is heading for its biggest one-day loss since June 17. Those investors already charge France 130 basis points more than Germany to borrow for ten years, the widest gap since 2012. Prime Minister Lecornu's two predecessors both lost their jobs over budgets. EUR/USD trades just under 1.1250 after falling to its lowest since May 2025.

The ECB raised rates twice in 2011 and cut by November as the debt crisis spread

The budget freezes public-sector pay and most pensions to limit the deficit to 5% of Gross Domestic Product (GDP), and France has been running deficits above that. The European Central Bank (ECB) raised its deposit rate to 2.50% on September 10, its second increase this year, and markets are pricing more because inflation is above 3%. Every increase adds to what France pays on new debt.

For EUR/USD, that means an ECB that may stop short of what inflation calls for, against a Fed already at 3.75%-4.00%. The ECB's bond-buying backstop is reserved for selling it judges unwarranted and disorderly, and a premium that widens on a published deficit may not count as either.

A 3.6% inflation forecast against a 2.50% deposit rate

The euro area's flash Harmonised Index of Consumer Prices (HICP) for September is due on Friday at 09:00 GMT, forecast at 3.6% YoY from 3.2%, with the core rate forecast at 2.5% from 2.4%. ECB Executive Board member Cipollone speaks before the release and ECB Vice-President Vujčić after it. US payrolls follow at 12:30 GMT.

A hot reading could raise the odds of an ECB hike on October 29 and, with them, the cost of that hike to France. Germany, France, Italy and Spain reported their September figures on Wednesday, all above forecast, so most of Friday's number is already known.

The Euro's levels below 1.1300

Resistance: 1.1300 gave way on Thursday, a first since May 2025, and the bounce that followed stalled just above it. Thursday's high, short of 1.1350, came before the selling started.

Support: 1.1200 sits just under Thursday's low, the lowest since May 2025. 1.1150 is the next round level beneath it.

Bias: Short below 1.1300 on a daily closing basis, looking for 1.1200 first and 1.1150 second. The daily Stochastic Relative Strength Index (Stoch RSI) reads near 3, close to the floor of its range, so a rebound toward 1.1300 on Friday's two releases would sit inside the call. A daily close back above 1.1350 makes it wrong.

EUR/USD daily chart