EUR/USD faces pressure as a sell-off in French assets drives capital outflows and the 10-year French yield tops 5%. The dollar is trying to resume its climb, and the Fed and ECB meetings now set the near-term direction.
Capital outflows fuelled by a sell-off in French assets and rumours of ECB intervention in debt markets are keeping EUR/USD under pressure. Meanwhile, the US dollar is attempting to resume its upward trend as Treasury bond yields fall sharply.
French bond holdings feed the outflows
Non-residents hold 55% of the French bond market, against 30-33% in the US and 13% in Japan. Barclays estimates that around 31% of French debt sits with non-European investors.
The yield on 10-year French government bonds has risen above 5%, its highest level since 2002. Political instability and difficulty reducing the budget deficit are increasing risks to the eurozone financial system.
ECB and Fed meetings set the tone
Markets expect the ECB to leave rates unchanged at 2.65% at its next meeting but acknowledge the possibility of a rate hike in December. Investors also expect the Fed to hold rates at its 27–28 October meeting, although the likelihood of a December hike remains high.
If the ECB acts, FxPro analysts say it may start with verbal interventions, then reduce bond sales, with the TPI as a last resort. The latter two measures increase the supply of euros, which is likely to put pressure on EUR/USD amid Fed tightening.
Yen and franc regain safe-haven roles
The Swiss franc and the Japanese yen have reverted to their roles as safe-haven assets amid the French budget crisis and fears of an escalation of the conflict in the Middle East. According to Claus Vistesen of Pantheon Macroeconomics, between 10% and 15% of French debt is held by Japanese investors, who are increasingly turning their attention to Japanese bonds after the Bank of Japan's monetary tightening. The natural consequence was that EUR/JPY weakened to 12-month lows, a 5.7% decline since the end of August.
On the H4 chart, EUR/USD remains in a downtrend after an upward correction towards resistance at 1.1268. The initial target is 1.1188, and a break below that support would open the way towards 1.1174 and then 1.1149.
With key central bank meetings scheduled for the final week of October, consolidation and a wait-and-see approach in the Forex market look more likely.
Sources: ActionForex (FxPro Analyst Team), ActionForex (RoboForex)
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