Euro edges higher above 1.1200 despite political unrest and fiscal concerns in France

• Near 1.1235, EUR/USD posts a modest gain in early Asian trading on Thursday.
• A deteriorating fiscal outlook and widespread anti-government demonstrations in France could leave the Euro facing some selling pressure.
• Only a modest probability of a rate rise next week is reflected in market pricing.

With EUR/USD near 1.1235, the pair is making modest headway in Thursday’s early Asian session. Further advances could nevertheless be constrained by unease over France’s political and fiscal prospects. Later in the day, European Central Bank (ECB) policymaker Fabio Panetta is due to speak.

For the first time in 24 years, France’s 10-year borrowing costs exceeded 5% on Wednesday. In the previous session, the yield on the benchmark 10-year obligation assimilables du Trésor (OAT), issued by the French Treasury, advanced more than 8 basis points (bps) to 5%, subsequently easing to 4.99%.

Financial markets are unsettled by political uncertainty and the government’s inability to reach agreement on a long-delayed budget, potentially weighing on the single currency in the near term. After last weekend’s riots and looting, French President Emmanuel Macron pledged to prevent a recurrence. Meanwhile, the Yellow Vest movement submitted plans for a large march in Paris on Saturday, setting up the government’s next major test.

John Hardy, global head of macro strategy at Saxo in Copenhagen, said: "The French debt situation isn't tractable. They do need to go in and make proper adjustments on the fiscal side to get this debt level down to at least show the seriousness around the trajectory,"

In the US, the CME FedWatch tool shows that Fed funds traders assign only a slim chance to a Federal Reserve (Fed) rate increase next week. December is the expected timing for the next rise in interest rates. Nor is Fed Chairman Kevin Warsh likely to offer guidance on subsequent moves.

Euro remains resilient as EUR/USD links with energy and bonds weaken

The unexpected resilience of EUR/USD has drawn attention from analysts at Societe Generale, who observe that “for EUR/USD, it’s curious that cycle highs in nat gas prices and bond jitters have not triggered another leg down in a way that would have occurred prior to October.” The pair’s usual relationships with energy prices and bond yields are no longer following their earlier pattern in the cycle. As the analysts put it, “the correlations have broken down over the past two weeks or so,” a development which, in the bank’s view, “would suggest that most of the bad news is priced in or investors are not committed to putting on new directional trades, playing the ranges instead.”

Fed leaves year-end options open as Warsh highlights investment growth and AI risks

At 5.6/10 against an established baseline of 6.1/10, the FXS Speechtracker score reflected a slightly softer, less emphatic tone in Fed Chair Warsh’s cautiously constructive remarks. His acknowledgement of being “over-scarred from the Global Financial Crisis” points to an enduring aversion to risk. At the same time, Warsh highlighted structural growth and a surge in investment supported by “good policies”, describing the forthcoming October and December meetings as the “crystalizing moment” for decisions on output, employment and inflation. He characterised AI as a near-term demand shock whose employment consequences remain uncertain. Alongside proposals for a field hearing and new Fed task forces, that emphasis suggests an institution seeking to capture technological benefits without overlooking adverse tail outcomes or threats to financial stability.

A move of 0.00 points left the FXS Fed Sentiment Index steady at a hawkish 127.51. The reading shows that the broader policy stance remains firmly above the neutral 100 threshold, notwithstanding the slightly softer FXS Speechtracker score. Taken together, the measures suggest markets should interpret Warsh’s comments as consistent with a high hurdle for easing: confidence in investment and AI-led productivity gains is balanced by the legacy of the financial crisis and close attention to price stability and tail risks.

Technical Analysis: EUR/USD retains a bearish bias below the 100-day SMA

Trading beneath both the 100-day simple moving average (SMA) and the middle Bollinger band leaves EUR/USD with a bearish near-term bias on the daily chart. Consolidation is taking place nearer the lower half of the recent volatility envelope. Meanwhile, the Relative Strength Index (14), at around 41, remains below the neutral 50 threshold, suggesting selling pressure continues to outweigh efforts to recover.

The middle Bollinger band, around 1.1245, provides the first resistance on any advance. Beyond that, further gains would probably encounter selling near the upper Bollinger band at 1.1370, before reaching the more significant 100-day SMA at 1.1455. For declines, the next notable support lies at the lower Bollinger band around 1.1120; a decisive break beneath it would clear the way for the broader downtrend to continue.

(The technical analysis of this story was written with the help of an AI tool. Know more.)