The Euro could recover against the US Dollar as bearish bets unwind, but Rabobank expects French fiscal risks to limit the rebound’s staying power.

Rabobank expects a Euro recovery towards 1.13 against the US Dollar in the coming weeks, as calmer French bond markets give investors an opportunity to close bearish currency positions.

EUR/USD ended Friday near 1.1201, leaving it around 1.1% lower since the start of October despite recovering from the week’s lows.

The bank keeps its longer-term expectations subdued: “That said, we do not expect the currency pair to be able to push significantly higher medium-term. Our 12-month forecast is EUR/USD1.12.”

Buying Euros to close bets against the currency could lift it temporarily, without requiring investors to become more confident about the region’s finances or economic prospects.

View full size

French bond selling becomes a currency problem

In our 1 October coverage of Rabobank’s Euro outlook, the bank argued that investors selling French bonds had largely remained in Euro-denominated debt, limiting the damage to the currency.

Its latest assessment puts greater weight on the risk of that money leaving the Eurozone.

Rabobank says: “By the end of last week, concerns were rising as to the risks of contagion to other highly indebted countries in the Eurozone. This was likely a crucial element in igniting pressure on the EUR.”

“Previously, it appeared that sellers of OATs were rolling into other EUR denominated assets, possibly Italian, Spanish or German government debt. The question of contagion appeared to incentivise sellers of OATs to question exposure to the Eurozone and to the EUR.”

OATs are French government bonds, while German Bunds provide the benchmark against which their borrowing costs are commonly compared.

Moving between those markets need not involve selling Euros, whereas moving money into Dollar assets can create demand for the US currency.

Rabobank cites Banque de France figures showing foreign investors held 57.84% of OATs in the second quarter, giving overseas investment decisions considerable importance for French financing.

Budget credibility complicates an ECB rescue

The bank sees little prospect of immediate European Central Bank intervention resolving France’s difficulties, arguing that support without a convincing budget could damage the ECB’s credibility.

The ECB’s Transmission Protection Instrument criteria include fiscal sustainability and compliance with the EU’s fiscal framework, with activation subject to the Governing Council’s assessment.

The programme addresses disorderly financing conditions that are not warranted by a country’s economic fundamentals.

Rabobank highlights the political obstacles: “The French government has announced a budget proposal that includes tax hikes and spending cuts which will be debated in parliament over the coming weeks. Mass protests against education provision, however, demonstrate how difficult an austerity budget will be.”

The bank says: “While opposition parties may allow a budget to pass, this may be only so that they can change it after next spring’s Presidential election.”

Rabobank points to another possible route for intervention: “In any case, it is widely considered more likely that any initial intervention by the ECB to stabilise markets would likely take the form of a pausing of QT.”

Quantitative tightening reduces central-bank bond holdings as securities mature without the proceeds being reinvested, as the ECB’s asset-purchase programme guidance explains.

Pausing that process could ease pressure on bond markets, although it would leave the French government responsible for securing a credible budget.

Dollar confidence limits the Euro’s recovery

The Euro has also lost support from investors who previously expected German fiscal expansion to improve its prospects.

Rabobank says: “In 2025, the market ratcheted up long EUR positions at the start of the year on the back of optimism regarding the loosening of Germany’s debt brake. These long positions were held up to the start of the Iran War when they quickly evaporated.”

Rabobank says: “Factors such as the region’s energy importer status, concerns about a hybrid Russian war and political worries concerning the growth of the far-right in both Germany and France are likely undermining the single currency.”

The bank reports bargain hunting in French bonds as yields retreated from their weekly peaks.

“At the same time, confidence in the outlook for the greenback is far stronger than a year ago. Just as interest in the EUR likely facilitated USD selling last year, the more positive outlook for the greenback is likely encouraging investors to stay short of the EUR.”

Rabobank also sees an imbalance in how investors are treating fiscal risks: “At the same time, the robust growth backdrop in the US has favoured the USD and distracted attention away from the US’s also very significant budget deficit.”