FX markets have started the week quietly, but the risks hanging over markets remain unresolved. Energy prices are still elevated on the threat of escalation in the Middle East, Coreweave’s () bonds still trade at 80 cents on the dollar, and French bond spreads are pushing wider as the French situation deteriorates. It is hard to get too bearish on the dollar
USD: Consolidation Continues
FX markets have had a quiet start to the week. The dollar is down a fraction versus the commodity currencies, but up a fraction against the low-yielding and – the latter driven by some US equity stability and a modest back-up in short-dated US rates. Yet none of the key themes and threats have really changed. Energy markets remain nervous that the US and Israel may once again attack Iran ahead of the US Mid-Terms. Or at least energy prices are staying at their highs, preventing much of a correction in bond yields. Concerns over business models of the high-yield US data centre providers remain, with Coreweave’s 2032 bond still trading at 80 cents on the dollar. This represents the key threat to dollar strength. French debt spreads continue to widen as conclusions harden that France is still far from any fiscal consolidation.
This mixed picture extends across emerging markets too, where the and are sharply diverging – having previously both traded together as chip exporters. The learning here is that central bank policy makes a big difference and the divergence can be explained, we think, by the Taiwanese dollar being punished for a local central bank failing to hike rates in September.
Barring a major leg lower in US tech stocks (Tesla (), Meta () and IBM () report Q3 earnings tomorrow), we expect the dollar to remain relatively supported. Softish US housing data looks unlikely to weigh on the dollar and the weekly employment data is not usually a market mover.
Overall, we expect energy and French news to dominate, meaning that the should find further support at 101.50/60.
EUR: Remaining on ’OAT-Watch’
is finding a little support even as French debt spreads widen. The French news should remain euro-bearish, as today the lower house votes on the revenue side of the proposed 2027 budget. Both the left and the right have attached numerous amendments to the original bill, meaning that even if it passes, markets are unlikely to welcome it. And the budget bill bouncing between the lower and upper houses into early December seems to be the base case. This week French sovereign debt also has to cope with a Moody’s rating review on Friday. Here Moody’s could play catch-up with the other agencies in cutting France to a single A-rated issuer. The move is expected; investors are underweight French debt, but there is still little concern that the loss of the final AA rating from the big three agencies could lead to some forced selling.
Despite French budget stress and high energy prices, eurozone business optimism has been holding up surprisingly well. That will be tested today with the release of the German ZEW index and on Friday with the flash PMIs across the region. These are all expected to edge a little lower, but probably not enough to dent the euro.
Expect EUR/USD to remain on ’OAT-watch’ today. While a period of consolidation/correction looks necessary after a big fall in September, the case for a EUR/USD recovery remains weak. A move to 1.1180 looks as likely as a rally to 1.1270.
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