Francesco Pesole at ING highlights that the Euro (EUR) is under pressure from French bond market turbulence, which is adding a fiscal risk premium and driving a repricing lower in European Central Bank (ECB) rate expectations. Swap differentials now resemble levels historically consistent with weaker EUR/USD. ING sees limited confidence in a sustained rebound and warns that EUR/USD could test 1.1100 or even 1.1000 if bond stress intensifies.

French fiscal fears weigh on Euro

"The euro started the week at the bottom of the G10 scorecard, a clear signal that turbulence in the French bond market remains firmly on FX investors’ radars. The euro is being affected through two channels: a direct one, where a fiscal risk premium (so far not extreme) has been added, and an indirect one via a repricing lower in ECB rate expectations."

"Pricing for the March ECB meeting has declined from 80bp on 24 September to 45bp now. This has been a very EUR-specific move and has pushed the EUR:USD two-year swap rate differential (ESTR-SOFR) to -167bp. The last time the spread was at these levels was in August 2025."

"Some relief in French bonds yesterday helped EUR/USD recover to just above 1.1200 after a fall to 1.1160, but we don’t have much confidence in a sustained rebound. The fiscal risk premium is still relatively limited, leaving scope for EUR/USD to test 1.1100 or even 1.1000 if bond market stress intensifies. Markets are now awaiting details from Marine Le Pen on a counter-budget."

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