EUR/USD: French risk premium weighs on Euro – ING

ING’s Chris Turner argues that the French debt sell-off has broken the narrative of ever-higher short-term rates and raised doubts about further European Central Bank (ECB) tightening.

Debt stress drives Euro downside

"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."

"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. And after the break of technical support yesterday, near-term EUR/USD looks biased to 1.1100/1120, if not closer to 1.10. We would expect upside corrections to be relatively shallow now."

"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)."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)