Fifteen years ago sovereign-debt fears in Europe nearly toppled markets, and the culprit was a small Greek debt. The anxiety has returned, like deja vu, but the accused has changed. The euro closed lower in 11 of the last 14 trading days, and EUR/USD slid to its lowest levels since June. This time France — the largest borrower in the eurozone — is under suspicion.

Political risk is a negative factor for the euro. French 10-year yields have overtaken German yields by one percentage point, something not seen since 2012. This jump signals panic in the government-bond market. Protests in 2023 erupted when Emmanuel Macron bypassed parliament to raise the retirement age to 64 gradually. The far-right frontrunner in the 2027 election wants to restore the previous retirement age, while a far-left rival proposes simply writing off the country's debt. Both promises would add billions of euros to annual borrowing needs. Global equity markets have not panicked so far, because capital is flowing into US technology rather than into local stocks.

European inflation dynamics

Another headwind for the euro is the European Central Bank's caution. Christine Lagarde said the central bank is taking a "middle way" between inflation and the risk of slowing growth. The ECB raised its inflation projections for 2027 and 2028 to 2.5% and 2.1%, respectively, due to the war in Iran and expensive energy, and Lagarde said the impact of AI on inflation remains unclear.

That cautious rhetoric allowed the futures market to cut the probability of a deposit-rate hike in October from 39% to 31%. Across the Atlantic, derivatives price in about a 73% chance of Federal Reserve tightening in the same month. The Fed is outpacing the ECB like a sprinter off the blocks, and the rate differential remains a bullish factor for the dollar, keeping EUR/USD under pressure.

Another support factor for the greenback is the AI spending boom. Capital is flowing out of Europe into North America, where the largest data centers are being built.

LNG imports into Europe

Haunting EUR/USD is also the specter of the 2022 energy crisis, when the euro fell below parity with the US dollar. Talks over the Strait of Hormuz have stalled, and gas storage in Europe is 71% full versus a five-year average of 87%. Axpo Holding warns prices could jump above €100/MWh if it gets cold. According to Kpler, Europe is now consuming a quarter of global LNG shipments versus 19% in July.

Thus, EUR/USD is pressured by France's political crisis, the Fed's faster pace of monetary tightening, and the threat of an energy crisis in Europe. Only a change in Christine Lagarde's rhetoric or a de-escalation over the Strait of Hormuz could restore support for the euro.

Technically, on the daily chart, EUR/USD is moving according to plan. The major pair is heading confidently toward previously indicated targets at 1.13 and 1.12. We continue to use rallies to add to short positions.