Euro softens below 1.1250 on France’s fiscal risk

• EUR/USD declines to near 1.1245 in Monday’s early Asian session. 
• France’s fiscal risks weigh on the Euro. 
• Traders reduce their bets of Fed rate hike in October following weaker US jobs data.

The EUR/USD pair loses momentum to around 1.1245 during the early Asian session on Monday. The Euro (EUR) weakens against the US Dollar (USD) amid fears over France’s shaky fiscal trajectory. The US ISM Services Purchasing Managers Index (PMI) report is due later on Monday. 

French Prime Minister Sébastien Lecornu’s minority government unveiled a highly contentious €54 billion belt-tightening draft budget for 2027 to stave off a catastrophic downgrade or sovereign default. Nonetheless, analysts doubt that the minority government in France would be able pass the budget at Parliament without concessions.

A report from Associated Press (AP) revealed that the public debt in France now stands at 119% of Gross Domestic Product (GDP). French government bonds have faced some selling pressure in recent weeks amid expectations of rising policy rates and growing political and risks. French 10-year yields jumped to their highest level since 2002 last week. 

Across the pond, traders reduced their bets that the US Federal Reserve (Fed) will hike the interest rate this month following the weaker US jobs data. Traders are now pricing in nearly a 77.9% chance that rates would be unchanged at Fed October’s policy meeting, compared with 74% before the data.

Eurozone rate hike odds fade as ECB waits for December projections

Analysts at Standard Chartered note that underlying price pressures remain contained, observing that “core inflation has drifted only modestly higher since late February, rising from 2.2% in January to 2.5% y/y in September.” They add that policy communication has turned more cautious, with President “Lagarde [having] highlighted the downside risks to both growth and inflation arising from higher yields.” Standard Chartered argues that “these factors limit the likelihood of an October hike, in our view,” and concludes that “on balance, [they] think that the Governing Council would prefer to wait for new macroeconomic projections to deliver a policy rate change, the next of which will accompany the December policy meeting.”

Logan’s hawkish tilt boosts Fed rate expectations and supports the Dollar

Fed’s Logan delivers a distinctly more hawkish tone, with the 9.2/10 FXS Speechtracker score standing well above the 8.1/10 historical average, signaling a stronger conviction on the need for tighter policy. The emphasis that higher yields may reflect increased term premiums, potentially reducing the need for further tightening, is overshadowed by explicit guidance that the policy rate must rise by at least 50 bps and likely through several additional hikes to restore price stability, reinforcing upside risks for the Dollar and front-end yields. Logan’s acknowledgment that current policy is not yet restrictive, alongside a strengthening economic expansion and balanced labor market, underscores a clear bias toward further rate increases until inflation is credibly on a path to 2%.

The FXS Fed Sentiment Index climbs by 1.68 points to 136.59, firmly in hawkish territory and consistent with the elevated FXS Speechtracker score. This move confirms that Fed communication is skewing more hawkish relative to the established baseline, reinforcing expectations for additional tightening and supporting the Dollar against lower-yielding peers.

Technical Analysis: EUR/USD retains a negative tone amid oversold conditions

In the daily chart, EUR/USD extends its slide beneath the 100-day simple moving average (SMA) and the Bollinger Bands’ middle line, which now cap the pair and define a firmly bearish near-term bias. Price is only slightly above the lower Bollinger band, while the Relative Strength Index (14) at 20.2 sits in oversold territory, suggesting that while downside pressure dominates, the sell-off is becoming stretched.

On the topside, initial resistance is located at the Bollinger middle band near 1.1440, followed by the 100-day SMA at 1.1510, with a stronger barrier at the upper Bollinger band around 1.1685. On the downside, immediate support is offered by the lower Bollinger band at 1.1200; a sustained break below this floor would open the door to further losses, whereas any rebound from this zone would likely struggle as long as the pair remains locked under the aforementioned moving average and volatility band resistances.

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