Can the euro hold modest gains above 1.1200 despite French political unrest and fiscal concerns?

• Modest gains take EUR/USD towards 1.1235 in early Asian trading on Thursday.
• The Euro could face selling pressure as France grapples with widespread anti-government demonstrations and a deteriorating fiscal outlook.
• Market pricing assigns only a slim probability to a rate hike next week.

Modest buying supports EUR/USD near 1.1235 in Thursday’s early Asian session, although worries about France’s political and fiscal prospects could constrain further gains in the major currency pair. Later in the day, European Central Bank (ECB) policymaker Fabio Panetta is scheduled to speak.

Wednesday saw France’s 10-year borrowing costs move above 5% for the first time in 24 years. In the previous session, the yield on the French Treasury’s benchmark 10-year bond, known as obligation assimilables du Trésor (OAT), advanced by more than 8 basis points (bps) to 5%, before easing to 4.99%.

Financial markets remain unsettled by political uncertainty and the government’s inability to reach agreement on a long-delayed budget, potentially weighing on the single currency in the near term. With the Yellow Vest movement filing plans for a large march in Paris on Saturday, the government faces its next major test. French President Emmanuel Macron has pledged to stop a repeat of the riots and looting seen last weekend.

John Hardy, global head of macro strategy at Saxo in Copenhagen, said: "The French debt situation isn't tractable. They do need to go in and make proper adjustments on the fiscal side to get this debt level down to at least show the seriousness around the trajectory,"

In the US, the CME FedWatch tool indicates that Fed funds traders assign only a slim chance to a Federal Reserve (Fed) rate hike next week, while expecting the next increase in December. A signal on subsequent policy moves from Fed Chairman Kevin Warsh also appears unlikely.

Why is the Euro holding firm as EUR/USD links with energy and bonds weaken?

The unexpected resilience of EUR/USD has drawn attention from analysts at Societe Generale, who observe that “for EUR/USD, it’s curious that cycle highs in nat gas prices and bond jitters have not triggered another leg down in a way that would have occurred prior to October.” In their assessment, “the correlations have broken down over the past two weeks or so,” as the pair’s established relationships with energy prices and bond yields cease to follow patterns seen earlier in the cycle. The bank believes this change “would suggest that most of the bad news is priced in or investors are not committed to putting on new directional trades, playing the ranges instead.”

What do Warsh’s investment and AI remarks mean as the Fed retains year-end flexibility?

A somewhat less emphatic tone accompanied Fed Chair Warsh’s cautiously constructive remarks: the FXS Speechtracker reading of 5.6/10 was slightly softer than the established 6.1/10 baseline. His acknowledgement of being “over-scarred from the Global Financial Crisis” points to an enduring aversion to risk. At the same time, Warsh highlights structural growth and a surge in investment supported by “good policies”, identifying the forthcoming October and December meetings as the “crystalizing moment” for decisions concerning output, employment and inflation. His emphasis on AI as a near-term demand shock with uncertain consequences for employment, together with plans for a field hearing and new Fed task forces, suggests the institution is seeking to capture technological benefits while protecting against downside tail risks and threats to financial stability.

At a hawkish 127.51, the FXS Fed Sentiment Index recorded no change, moving 0.00 points. The reading remains well above the neutral 100 threshold, signalling a firmly hawkish overall policy stance despite the modest softening in the FXS Speechtracker score. Taken together, these signals suggest markets should interpret Warsh’s comments within a framework that sets a high bar for easing. Optimism about investment and AI-led productivity is balanced by the legacy of the financial crisis and a strong emphasis on price stability and tail risks.

Technical Analysis: Can EUR/USD shake off its bearish outlook below the 100-day SMA?

A near-term bearish bias persists on the EUR/USD daily chart, with the pair trading beneath both the 100-day simple moving average (SMA) and the middle Bollinger band. Consolidation is taking place nearer the lower half of the recent volatility envelope. Meanwhile, the Relative Strength Index (14), at around 41, remains below the neutral 50 threshold, suggesting selling pressure continues to outweigh recovery efforts.

The middle Bollinger band around 1.1245 provides the first upside resistance. Beyond that, advances are likely to encounter selling near the upper Bollinger band at 1.1370, followed by the more significant 100-day SMA at 1.1455. The next key downside support lies around 1.1120 at the lower Bollinger band; a decisive break below it would pave the way for the broader decline to extend.

(The technical analysis of this story was written with the help of an AI tool. Know more.)