France's bond market issues new warning for EUR/USD

The euro faces the same familiar issue at the start of a new week. France is once again causing fresh trouble for the single currency.

Over the weekend, riots across France added to the pressure on Emmanuel Macron's administration, while investors already doubt the country's ability to put its fiscal situation in order. The bond market offers little reassurance on that front, with the gap between French and German 10-year bond yields widening again to near 145 basis points. That brings the 150 basis point threshold back into view.

This reinforces the pressure point for European bonds, as the spread was hovering near 85 bps at the start of September.

France is already dealing with a rising fiscal deficit, political divisions, and a challenging route to budget consolidation. Consequently, the recent unrest makes it even tougher for the government to implement unpopular spending reductions.

What does this mean for the euro?

EUR/USD is drifting lower toward 1.1200, with sellers retaining a strong grip and the pair trading well below its 100-day and 200-day moving averages.

A decisive move below 1.1200 would next open the October low near 1.1113, whereas a significant rebound must first surpass 1.1250, with the 23.6% Fibonacci retracement around 1.1254 providing initial resistance. Beyond that, the 38.2% Fibonacci retracement near 1.1341 could become relevant.

Currently, the greater risk is that France's difficulties might begin to spread to wider euro zone bond markets. If that happens, what is now a French political issue could become a more serious problem for the euro.

Should the French-German yield spread break through 150 basis points, the euro could face a turbulent period as October trading progresses. Additionally, Moody's is scheduled to review France's credit rating on October 23, which could be another catalyst for euro traders.