The euro is trying to recover after a significant drop
The euro in the FOREX market is trying to stabilize after a sharp decline at the beginning of the week. On Tuesday, October 6, the single European currency showed a noticeable upward correction: the EUR/USD pair rose by about 0.35% and reached the area of 1.1276 dollars. The day before, the euro had dropped to the level of 1.1161 dollars—a minimum in about 17 months.
The main reason for the euro's recovery was a certain reduction in tension in the French government debt market. The yields of French bonds went down on Tuesday, which temporarily eased concerns about the spread of debt problems to other eurozone countries. Additional support for the euro came from a decline in oil prices and a slight weakening of the US dollar.
However, it is too early to talk about a full-fledged upward reversal of the euro. As recently as Monday, the currency lost more than 1% over the week, and overall EUR/USD had been in a prolonged decline. Therefore, the current movement is more like a technical correction after a strong fall than the formation of a new sustainable upward trend.
France remains the main risk for the euro
The main threat to the European currency is currently linked to the financial and political situation in France. High government debt, problems with budget approval, and rising borrowing costs are forcing investors to demand a higher premium for holding French bonds.
Additional uncertainty is created by the political situation in the country ahead of the upcoming elections. At the same time, political risks are also intensifying in other European countries: early elections have been called in Spain. All this makes investors more cautious about European assets.
If French bond yields start rising rapidly again, the euro may come under renewed pressure. In that case, the nearest important support zone for EUR/USD will be the area of 1.1160–1.1200 dollars, and a break below could open the way to 1.10.
What is happening with the dollar
The American currency, despite a certain correction on Tuesday, remains relatively strong. The dollar is supported by high US Treasury yields and continued demand for American assets. The dollar index recently reached a maximum in about 18 months.
However, the dollar also has serious risks. First, weak statistics from the US labor market lowered expectations of another Fed rate hike in the near future. Second, excessively high US bond yields are gradually becoming a problem for the US economy and government budget.
In addition, the high level of US government debt and the need to constantly place new volumes of Treasuries may in the future force investors to assess American financial risks more carefully.
Prospects for EUR/USD
Thus, the market is currently in a kind of equilibrium. The euro is hindered by political and debt problems in France, while the dollar faces risks related to the US government debt, high bond yields, and the prospects for the Fed's monetary policy.
The next important event for the market will be the publication of the minutes of the last Fed meeting, which could significantly change expectations regarding the future trajectory of American interest rates.
For now, the advantage remains on the side of the dollar. A recovery of EUR/USD above 1.1250–1.1300 could be the first signal of easing downward pressure on the euro. But as long as the pair remains below this zone, the risk of retesting the lows around 1.1160 persists.
Overall, the current situation can be characterized as a correction of the euro after a sharp fall, with fundamental risks for the European currency still elevated.
