Euro: Bullish reversal builds above support – Scotiabank

Scotiabank's Global FX Strategy team highlights EUR/USD is buoyed by a modest narrowing in Eurozone-US spreads due to dovish remarks from Fed Chair Jerome Powell. Although French OAT/Bund spreads remain wide, they are deemed a minor factor for the Euro's strength. The bank forecasts fair value at 1.1285 and points to a possible bullish weekly reversal if late-week gains hold.

Notably, the French government bond rout has eased, keeping the 10Y OAT/Bund spread between 135-140bps, wider than other similarly-rated Eurozone sovereign bonds but still far below the 2011 crisis levels. The EUR's connection to Eurozone sovereign spreads is intermittent, with other elements exerting more influence on the foreign exchange market.

Powell's cautious comments on policy outlook have facilitated a slight narrowing in front-end EZ/US spreads, bolstering the EUR. Marginally, OAT tensions may shift ECB risk aversion prior to the month-end meeting, but they are not expected to affect the December decision, where a 25bps hike is already priced in. The bank calculates EUR/USD fair value at 1.1285.

A robust recovery from the long-term retracement support in the 1.11 region (50% retracement of the EUR's 2025/26 rally from 1.01) and breaking past resistance at 1.1240/50 are propelling the EUR toward a potential bullish weekly reversal, provided the currency sustains late-week gains.