France is hitting the euro

EUR/GBP

Key zone: 0.8460 - 0.8500

Buy: 0.8510 (on a decisive break above 0.8500); target 0.8600-0.8620; StopLoss 0.8460

Sell: 0.8450 (on strong negative fundamentals) ; target 0.8350; StopLoss 0.8500

The French debt crisis is no longer exclusively a problem for the OAT market. The rise in the risk premium is weighing on the euro, supporting the Swiss franc, and changing expectations for ECB rates. The main question for the currency market is now whether stress in France will turn into a new eurozone fragmentation crisis.

For much of the past decade, lending to France was considered almost as safe as lending to Germany. That confidence is now disappearing rapidly.

A reminder:

France’s government debt reached €3.5955 trillion, or 119.0% of GDP, at the end of Q2 2026. Borrowing costs rose to their highest level since 2002, while the spread with Germany widened to its highest since 2011. Last week, investors demanded yields of up to 5% annually for lending money to the French government for 10 years.

France is too large for stress in its debt market to remain local. French risk is becoming European risk. The premium investors demand for French bonds over German bonds has risen to its highest level since the 2011–2012 eurozone debt crisis.

In other words, France is now paying more to borrow than Italy and Greece — countries that were at the epicenter of the crisis at the time.

The rescue plan remains just a proposal for now. Last Thursday, Prime Minister Lecornu’s government presented its 2027 budget, which provides for around €54 billion in spending cuts and additional revenue. The deficit target is 5% of GDP next year, compared with 5.4% in 2026.

Around two-thirds of the fiscal adjustment is expected to come from spending restraint, with another third coming from higher taxes and contributions. In particular, the plan calls for €6 billion in savings in both the pension system and healthcare. Government spending, excluding debt servicing and defense, is planned to be frozen in nominal terms. Adjusted for inflation, this amounts to an effective tightening of budgets.

But instead of reassuring investors, these measures made them more cautious.

France is already attacking the euro through three channels:

• Direct capital outflows — when an international investor sells OATs and moves funds outside the currency bloc, the transaction creates direct demand for USD, CHF, or other currencies and supply of EUR.
• Banks — rising government bond yields mean falling market values. French and European banks are major holders of sovereign debt, so a further decline in OATs could reduce collateral values, increase volatility in bank capital, and tighten financial conditions.
• ECB expectations — inflation requires tight policy, but further rate hikes simultaneously increase pressure on the most heavily indebted countries.

This is precisely why the market has reduced expectations for further ECB tightening. For EUR/USD, this has become an additional source of pressure.

But the main currency beneficiary of French risk is EUR/CHF: the Swiss franc acts simultaneously as a safe-haven currency and as an alternative to the euro within Europe.

The pound also benefits from euro weakness. The UK is outside the eurozone, so French sovereign risk is not directly embedded in the BOE’s monetary-policy mechanism. At the same time, Britain itself is dealing with high debt-servicing costs and rising gilt yields. Therefore, in a global risk-off environment, GBP/USD could easily decline at the same time as EUR/USD. GBP also receives additional support relative to EUR from the market’s continued more hawkish stance on BoE policy.

And What Is the Result?

The ECB can stop the panic, but it cannot solve the problem. The main argument against the scenario of a new eurozone crisis is that the ECB now has tools that did not exist at the beginning of the 2010–2012 crisis.

The ECB can purchase a country’s government bonds if disorderly market moves threaten the single monetary policy. However, in such operations, the regulator must take into account compliance with EU fiscal rules, public-debt sustainability, and the quality of macroeconomic policy. In addition, these purchases are designed to counter market moves that are not justified by fundamentals. But Paris’s problems are rooted precisely in high debt and a persistent deficit.

Economically, the direction is clear. Politically, it is almost unrealistic: France is entering the 2027 presidential cycle, parliament remains fragmented, and budget conflicts are coinciding with social discontent.

That is why it is now necessary to monitor simultaneously:

OAT-Bund spread → banking sector → ECB rate expectations → EUR/CHF → EUR/USD.

This sequence currently provides the earliest signal of a possible change in market regime.

So we act wisely and avoid unnecessary risks.

Profits to y’all!