Euro holds above 1.1200 despite paring gains as France remains in focus

• EUR/USD slips towards 1.1220, having met resistance just above 1.1260 on Tuesday.
• Appetite for sizeable Euro positions remains subdued as investors weigh political uncertainty and debt concerns in France.
• The US Dollar stays under pressure as investors assess how far the Fed's tightening cycle could extend.

Investor unease over unrest in France and the country's rising borrowing costs weighs on the Euro (EUR) against the US Dollar (USD) on Wednesday. Reversing part of its gains from recent days, EUR/USD trades at 1.1220 after its advance stalled just above 1.1260 on Tuesday.

Partial curfews were imposed in several French cities this week after student protests turned violent last weekend. The demonstrations had spread across the country over the preceding few weeks, before giving way to looting and destruction, images of which were seen around the world.

Are France's borrowing costs holding back the Euro's recovery?

Further pressure comes from the continued rise in France's debt premium. At 4.98%, the yield on the 10-year French OAT has reached its highest level in 24 years. Its spread over the German Bund, which is regarded as safer, has widened to 157 basis points. This measure of France's risk premium is now at its highest since the 2009-2011 financial crisis.

A subdued US Dollar is nevertheless lending the Euro some support and limiting further losses in the pair. With no major US macroeconomic releases to provide direction, the Dollar lacks momentum. Investors are preparing for a Federal Reserve (Fed) pause next week while assessing the extent of the monetary tightening cycle.

ING: Are AI concerns and a changing Fed Oil response weighing on the Dollar?

According to ING analysts, the Dollar “continues to trade with a soft undertone,” reflecting “a mix of some aftereffects of AI-related concerns (Corewave bonds had another wobble yesterday) and stretched longs/ short-term overvaluations being unwound.”

A modest change in the currency's response to energy markets is also evident, ING says, noting that “the dollar’s reaction function to Oil may have changed over the past week or so.” The analysts argue that “rising concerns about tech stocks have somewhat dented the market’s hawkish conviction on the Fed, allowing for greater dovish flexibility at the front end in response to non-data inputs like an oil selloff,” thereby adding to the Dollar's softer bias.