EUR/USD: Cristalisation of fears facing France

Yesterday, the symbolic 5% threshold for the 10-year French OAT (government bond) was quietly breached, pushing the spread to 156 basis points. The EUR/USD remains under pressure due to the "French situation" - specifically, a massive and rapid deterioration in the fiscal position of the Eurozone's second-largest economy. This bond market outcome reflects a lack of confidence among international investors, a sentiment further catalysed by events over the weekend.

It is worth noting that Saturday's demonstrations were marred by violence, property damage, and looting in several cities. Further tensions erupted the following day, while footage of the clashes was widely broadcast by foreign media outlets.

"In an environment of rising global bond yields, issuers must now offer higher rates to secure financing. This pressure is particularly acute for countries that carry high levels of debt and intend to continue borrowing (such as France, where public spending has been steadily increasing for several years. With the largest deficit in the Eurozone, France is therefore hit especially hard," explains Patrick Barbe, Head of European Investment Grade Fixed Income at Neuberger.

"The extent of the spread widening is driven more by a lack of buyers than by an influx of sellers as the vote on the French budget approaches. For its part, the French Treasury has maintained a high pace of issuance, aiming to complete nearly its entire borrowing program before the budget is adopted."

The persistently high cost of crude oil continues to fuel a significant inflationary risk in the EU, driven by a heavy reliance on external sources for hydrocarbon supplies. Naturally, the diplomatic impasse between Washington and Tehran is drawing the price of a barrel toward the highly psychological threshold of $100.

"While inflationary pressures are no longer confined to the energy sector, oil remains a core issue. Despite the near-normalisation of traffic through the Strait of Hormuz, Brent crude is holding steady around $100 a barrel. A key factor is the profound disruption in maritime transport, which has led to a shortage of available oil tankers - a situation exacerbated by the increased need for transshipments to move crude out of the Strait," explains Thomas Giudici, Head of Fixed Income Management at Auris Gestion. "Paradoxically, the resumption of exports is intensifying this shortage by tying up more vessels, which in turn fuels a surge in freight costs. According to the International Energy Agency (IEA), transporting a barrel from the Persian Gulf to Asia now costs nearly $35, compared to less than $7 before the war. Even more striking, Bloomberg reports that chartering a supertanker for a voyage between the United States and China costs nearly $79 million - more than the cost of launching a SpaceX Falcon 9 rocket!"

Right now, the EUR/USD is trading at $1.12192.

KEY TECHNICAL INDICATORS
Following a period of sideways movement, the downward volatility observed and measured on 13 September, provides a clear directional signal, allowing us to resume short positions on this major currency pair. The increase in volatility on 15 September - coinciding with a break below the 50-day moving average (shown in orange) - supports this scenario, as does the sharp downward acceleration on 22 September and the precise pullback to the $1.1411 level on 24 September, which has since turned into a major resistance level.

In the immediate term, the spot price is completing a classic wedge-shaped compression pattern.

MEDIUM-TERM FORECAST
Based on the above key technical factors, our outlook for the EUR/USD is negative in the medium term.

Our entry point is $1.1238. The price target for our bearish scenario is $1.0609. To protect your capital, we recommend placing a stop-loss order at $1.1412.

The potential profit for this strategy is 629 pips, while the risk of loss is 174 pips.