France is shooting the Euro

EUR/USD

Key zone: 1.1150 - 1.1250

Buy: 1.1320 (on a strong positive fundamental basis) ; target 1.1500-1.1580; StopLoss 1.1250

Sell: 1.1120 (on a pullback following a retest of 1.1230) ; target 1.1000-1.0950; StopLoss 1.1200

The French debt crisis has pushed the disastrous NFP out of the market spotlight. EUR/USD has hit its lowest level since May 2025, while the OAT–Bund spread has approached levels seen during the European sovereign debt crisis. For the euro, the greater danger now is not inflation, but the question: how much longer is the market willing to trust French finances?

The theory is simple: non-residents leave a country when the government cannot or does not want to pay. France today looks unattractive under both scenarios. The budget deficit was supposed to fall to 5% of GDP, but instead it is moving toward 6%. At the same time, new borrowing is becoming more expensive and the cost of servicing the accumulated debt is rising. The room for fiscal maneuver is shrinking.

The market is already reacting. The widening spread between French and German bonds to its highest level since the 2012 sovereign debt crisis is intensifying concerns about possible credit-rating downgrades for Paris and triggering capital outflows. Worse still, Italian, Greek, and Belgian bond yields are rising just as rapidly. This means the problem is no longer purely French: fragmentation risk is spreading across the eurozone.

A reminder:

The facts show just how sharply OATs and Bunds have diverged. On October 5, the yield on 10-year French bonds was around 4.88–4.90%, compared with approximately 3.43% for German bonds. France’s premium was therefore around 145–146 bps. Following a peak of approximately 159 bps late last week, this looks like little more than a brief respite. The peak was the highest in roughly 15 years.

• Rising OAT yields while Bund yields remain stable or decline indicate more than just a bond selloff. Capital is moving out of France and into safer European assets.
• France’s government debt reached €3.5955 trillion, or 119.0% of GDP, by the end of Q2, compared with 117.5% a quarter earlier. At the beginning of the year, the figure was significantly lower.
• France already has an A+ rating from Fitch and S&P. Moody’s maintains an Aa3 rating with a negative outlook. The agency’s next decision is expected on October 23, 2026. On October 2, Moody’s specifically noted that political fragmentation is making it more difficult to pass the budget and carry out fiscal consolidation.

Against this backdrop, weak NFP proved almost useless for dollar sellers. In September, nonfarm payrolls increased by only 29,000 — almost three times less than forecast. Previous data were revised down by another 60,000. Unemployment rose to 4.2%. The probability of Fed policy tightening in October fell to 18%. The dollar seemingly should have collapsed. Instead, it strengthened.

The reason is that the Federal Reserve does not need a strong NFP report to raise rates. An aging population and restrictions on immigration are slowing labor supply growth. Therefore, even an increase in the labor force participation rate points to continued resilience in the labor market.

At the same time, it is still too early to declare a new version of the 2012 European sovereign debt crisis. The ECB has the Transmission Protection Instrument, which allows it to counter “unwarranted and disorderly” fragmentation in the bond market. There are more stabilization tools available today than at the beginning of the previous crisis.

But the ECB’s position is extremely uncomfortable.

Eurostat’s preliminary estimate showed HICP accelerating to 3.8% y/y in September from 3.2% in August. Core inflation excluding energy, food, alcohol, and tobacco increased from 2.4% to 2.5%. The energy component remains particularly persistent: +18.8% y/y.

Formally, inflation calls for further tightening. But ECB rate hikes amid French debt stress would mean another round of rising eurozone bond yields. After that, the regulator may have to stop fighting inflation and start urgently rescuing the euro.

And What Is the Result?

The rules of the game have changed for EUR/USD. Previously, the market primarily compared the future rate paths of the Fed and ECB. Now, a separate premium for eurozone fiscal and political risk has been added to the interest-rate differential.

For traders, three risk levels are becoming critical:

• the 10-year OAT–Bund spread;
• Moody’s October 23 decision and the probability of a rating action;
• the ECB’s ability to fight inflation while simultaneously protecting the monetary transmission mechanism.

As long as the French spread remains around 145–150 bps and EUR/USD stays below 1.1250–1.1300, the market remains in bearish mode. The euro currently faces too many problems to expect a sustainable reversal higher.

So we act wisely and avoid unnecessary risks.

Profits to y’all!