2026.10.02 2026.10.02
Euro Plunges as French Debt Crisis Deepens. Forecast as of 02.10.2026

Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/

The French government’s presentation of its draft budget sent the EUR/USD pair to 16-month lows. However, developments in the US also contributed to the rise in domestic bond yields. Let’s examine the situation and develop a trading plan.

Major Takeaways

• The US dollar is being bought as a safe-haven asset.
• Bond yield spreads are signaling a crisis.
• France’s draft budget will be difficult to approve.
• Short positions can be opened with targets of 1.1200 and 1.1000.

Weekly Fundamental Forecast for Euro

There are signs of growing stress in the markets. The French government’s presentation of its 2027 budget proposal triggered divergent moves in European bond yields. Investors rushed to buy US and German government bonds while continuing to sell off bonds issued by other European countries. The EUR/USD pair subsequently plunged to its lowest level since May 2025 amid a flight to the US dollar as a safe-haven asset. Even a decline in the probability of a Fed rate hike in October to below 28%—after Philip Jefferson echoed John Williams’ call for a pause in the tightening cycle—did little to support bulls.

The French government presented an ambitious plan to reduce the budget deficit to 5% of GDP by 2027 through €54 billion in spending cuts. According to Finance Minister Sébastien Lecornu, only the adoption of this plan can keep alive the prospect of eventually bringing the deficit down to the EU’s 3% target. Initially, the government’s willingness to cut spending, combined with a successful bond auction and falling Treasury yields, helped push French bond yields lower. However, that relief proved short-lived, and yields subsequently climbed to 18-year highs. Investors appeared to conclude that the government would face significant difficulties in securing political support for the proposed measures.

France-Germany Bond Yield Spread

Source: Bloomberg.

As a result, the yield spread between French and German government bonds has moved within striking distance of the levels reached during the 2012 European debt crisis. Markets are increasingly concerned about the possibility of the French prime minister’s resignation, as well as the risk that the turmoil could spread to other eurozone countries.

However, developments in the US have also played a role in the recent market turbulence. Global bond markets are closely interconnected, and developments in the world’s largest economy inevitably affect government bond markets elsewhere. For example, Kevin Warsh’s speech at Jackson Hole, the US Treasury’s announcement of increased Treasury buybacks, and the Fed’s rate hike all influenced the yield spread between French and German bonds.

2-Year Treasury Yield and France-Germany Bond Yield Spread

Source: Bloomberg.

However, the US economy remains strong enough to withstand relatively high borrowing costs, while the state of the European economy leaves much to be desired. If the ECB were to suddenly decide to combat inflation as aggressively as the Fed, tighter monetary policy would push French bond yields even higher, leaving the government in an increasingly difficult position.

That is precisely why EUR/USD bears remain unfazed by a pause in the Fed’s monetary tightening cycle. They still expect roughly 100 basis points of additional rate hikes over the next 12 months, while the ECB is likely to move much more cautiously.

Weekly Trading Plan for EUR/USD

There are still no clear signs that the crisis in France is ending. Against this backdrop, the target levels for previously opened EUR/USD short positions can be lowered to 1.1200 and 1.1000.

This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.

Price chart of EURUSD in real time mode