EUR/CHF rebounds, but French-German yield spread keeps euro risks alive

This week has brought the euro a measure of relief against the franc, though I remain less than fully persuaded that the danger has passed.

EUR/CHF came under pressure late last week, slipping below 0.9300 and recording its weakest daily closing level since July. In the new trading week, however, the pair has bounced off the notable technical area near 0.9300, with the 100-day moving average and trendline support from the March and May lows offering buyers an additional layer of protection.

The immediate question is whether buyers can build on that recovery or whether this turns out to be only a short-lived pause.

For now, the group of support levels in the 0.9300 zone remains the critical threshold. A decisive break lower would next bring the 200-day moving average around 0.9236 into view, before a possible move toward 0.9200 opens up.

What is the main danger for the currency pair? The French-German bond yield spread is still elevated around 141 bps, not far from the recent peaks close to 150 bps.

A wider spread implies that investors continue to demand a sizeable premium for French bonds, while worries about public finances overshadow confidence. And the more this persists, the greater the risk that some of the present anxiety could bleed into other euro area bond markets.

At this point, it is certainly not the stage to describe things as another euro area debt crisis. Even so, it is a warning signal that I would not choose to ignore.

Tomorrow's US CPI report may act as another catalyst worth watching. A hotter-than-expected inflation reading could lift Treasury yields and hurt broader risk sentiment, potentially stoking fresh demand for the franc. In tandem, it could also set off another global bond market selloff and pull European yields higher, deepening the fiscal concerns surrounding French debt.

A milder report, by contrast, might provide EUR/CHF with some breathing room, mirroring the quieter tone of the new week so far. But even then, France's fiscal difficulties will not disappear overnight.