Euro: Downside risks with 1.1100 in sight against US Dollar – ING
Francesco Pesole at ING highlights that the Euro (EUR) is under pressure from French bond market turbulence, which is adding a fiscal risk premium and driving a repricing lower in European Central Bank (ECB) rate expectations.
ING's Francesco Pesole warns that the Euro (EUR) faces significant downside risks, with the 1.1100 level in sight against the US Dollar. The turbulence in France's bond market is adding a fiscal risk premium, causing a repricing lower in expectations for the ECB rate. Swap differentials now resemble levels historically associated with a weaker EUR/USD pair.
ING sees limited confidence in a sustained rebound, highlighting that EUR/USD could test 1.1100, or even 1.1000, if bond market stress intensifies. The euro began the week at the bottom of the G10 ranking, emphasizing that French bond market turbulence remains a major concern for FX investors. The euro's downward pressure comes from two channels: a direct one, involving a fiscal risk premium, and an indirect one, through a repricing lower in ECB rate expectations.
The March ECB meeting's pricing has decreased from 80 basis points on September 24 to 45 basis points now, significantly impacting the EUR:USD two-year swap rate differential (ESTR-SOFR), which has reached -167 basis points. This level represents the last time the spread was at such a low point in August 2025. A brief recovery in French bonds yesterday managed to lift EUR/USD to just above 1.1200 after dropping to 1.1160, but there is little confidence in a sustained rebound.
The fiscal risk premium remains relatively limited, suggesting a potential for EUR/USD to test 1.1100, or even 1.1000, if bond market stress worsens. Investors are now eagerly awaiting details from Marine Le Pen on a counter-budget.
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