Commerzbank’s Antje Praefcke notes that concerns over France’s national debt have recently weighed on the Euro, reviving memories of the earlier sovereign debt crisis. She argues fiscal consolidation in some Euro zone countries is both difficult and unpopular, so credibility will be hard to restore quickly. With the resilient US economy and limited new data, the Dollar is expected to remain in demand as EUR/USD struggles.

Euro pressured by French debt worries

“We’ve seen in recent days, amid concerns about France’s national debt, just how quickly doubts about the credibility of governments can weigh on the euro. That said, the focus is definitely more on the bond market than on the foreign exchange market. Nevertheless, for some who were already in the market back in the 2010s, memories of the sovereign debt crisis came flooding back: Long nights spent waiting for massive bailout packages and, at times, a drastic weakening of the euro.”

“Meanwhile, the ECB is remaining fairly tight-lipped regarding long-term yields and yield spreads in the euro zone. In any case, it is likely to wait and see before considering rushing to France’s aid with a program, especially since the situation has eased again. But with concerns about France’s public finances, the euro has lost some of its luster, and it is unlikely to regain it anytime soon.”

“At the same time, the US economy continues to show resilience. The weaker-than-expected US jobs report has not left any lasting impact on the US dollar, and both the ISM manufacturing index and the services index remain in expansionary territory. As such, there is no reason for a revaluation of the US dollar, especially since no major economic data releases are on the agenda in the coming days.”

“In this regard, the dollar is likely to maintain its position for the time being and remain the currency in greater demand, even though the euro is currently the focus of attention but urgently needs fiscal credibility to regain ground.”