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.
ING's Chris Turner suggests that France's debt sell-off has shifted the focus away from the idea of persistently rising short-term interest rates, and raised concerns about potential over-tightening by the European Central Bank (ECB). Yesterday, markets reached a critical juncture as France's bond sell-off broke the narrative of continually increasing short-term rates, prompting questions about whether central banks might be committing policy errors by tightening too aggressively.
If true, the ECB's need to tighten policies less than the Federal Reserve, could keep EUR/USD stable. My colleague, Francesco Pesole, noted that a 2% increase in the risk premium for the euro could occur if this bond market sell-off continues. Following the recent breach of technical support, EUR/USD may be biased towards the 1.1100/1120 range or even closer to 1.10.
Upside corrections are anticipated to be relatively modest at this stage. Investors expect any ECB response to the bond market sell-off to either involve minimal or no tightening of policy, or, as a last resort, the use of the Transmission Protection Instrument to buy bonds, both of which would be highly unfavorable for the euro.
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