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

On Thursday, France presented its 2027 budget in an attempt to appease investors who lend the country money. The EUR/USD currency pair is projected to experience its largest one-day loss since June 17. These investors currently charge France 130 basis points more than Germany for borrowing ten-year bonds, marking the widest gap since 2012.

Prime Minister Lecornu's two predecessors lost their positions due to budgetary issues. The EUR/USD is trading slightly below 1.1250 after plummeting to its lowest point since May 2025. The budget freezes public-sector wages and most pensions to keep the deficit at 5% of Gross Domestic Product (GDP), which France has consistently exceeded.

In September, the European Central Bank (ECB) raised its deposit rate to 2.50%, the second increase this year, as inflation exceeds 3%. Each rate hike increases the cost of new debt for France. Consequently, the EUR/USD may face a decline with the ECB potentially not meeting inflation expectations, contrasting with the Federal Reserve already at 3.75%-4.00%.

The ECB's bond-buying program is limited to selling assets judges unnecessary and disorderly. Should the deficit gap widen beyond the forecast, it may not qualify as such. The Eurozone's flash HICP for September is expected on Friday at 09:00 GMT, with a projected 3.6% YoY from 3.2%, and the core rate forecast at 2.5% from 2.4%.

ECB Executive Board member Cipollone speaks before the release, and Vice-President Vujčić after it. US payrolls are anticipated at 12:30 GMT. Market movements could heighten the likelihood of an ECB rate hike on October 29, increasing the financial burden on France. Germany, France, Italy, and Spain released their September figures on Wednesday, all surpassing expectations, rendering most of Friday's numbers already known.

Resistance: 1.1300 was breached on Thursday, a first since May 2025, and the subsequent bounce stalled just above it. Thursday's peak, just below 1.1350, occurred before the selling commenced. Support: 1.1200 is situated just below Thursday's low, representing the lowest since May 2025. The next significant level beneath it is 1.1150.

Bias: Consider shorting below 1.1300 on a daily closing basis, targeting 1.1200 first and 1.1150 second. The daily Stochastic Relative Strength Index (Stoch RSI) is near 3, near the lower end of its range, indicating a potential rebound toward 1.1300 on Friday's two releases. A closing above 1.1350 would invalidate this outlook.

The Euro serves as the currency for the 20 European Union countries comprising the Eurozone, ranking second among the most traded currencies globally. It accounted for 31% of all foreign exchange transactions in 2022, with an average daily turnover exceeding $2.2 trillion. The Euro is susceptible to fluctuations due to interest rates, as relatively higher rates or expectations of increases generally benefit the Euro.

The ECB Governing Council meets eight times annually to make monetary policy decisions, with final choices made by the Eurozone national banks' presidents and six permanent members, including ECB President Christine Lagarde. Eurozone inflation data, measured by the HICP, plays a crucial role in evaluating the Euro's health. Inflation exceeding expectations, particularly above the ECB's 2% target, necessitates an interest rate hike to restore control.

Higher interest rates relative to competitors typically enhance the Euro's attractiveness to global investors, strengthening its value. Significant economic data releases, such as GDP, manufacturing and services PMIs, employment, and consumer sentiment surveys, can impact the Euro. The Eurozone's largest economies (Germany, France, Italy, and Spain), accounting for 75% of the Eurozone's economy, provide vital indicators.

The Trade Balance, measuring the difference between exports and imports, also influences the Euro's value. A positive trade balance strengthens the currency, while a negative balance weakens it.