Credit Ágricole: FX Weekly - FJElite

EUR sentiment has weakened as rising European energy costs revive concerns reminiscent of the 2022 energy crisis. Fears over energy supplies linked to the Iran war have been compounded by global diesel shortages and low European gas storage levels ahead of winter, while the resulting increase in energy costs is adding to concerns about France’s fiscal outlook ahead of next spring’s presidential election. While the risks to the EUR have increased, the view is that a repeat of the severe 2022 sell-off is unlikely given the Eurozone economy’s resilience and relatively strong domestic demand.

The main risk is that weakness in French government bonds spreads further across the broader European government bond market, tightening financial conditions and limiting the ECB’s ability to maintain an aggressive tightening stance. This could undermine the EUR’s relative rate appeal. French fiscal concerns could also encourage Japanese investors to accelerate repatriation from European government bonds, supporting the JPY and weighing on EUR/JPY. For now, investors will be watching European energy prices, bond-market performance, financial conditions and ECB commentary closely.

The USD could remain supported as fixed-income volatility and tighter global financial conditions increase demand for its relatively high yield and safe-haven characteristics. However, current hawkish expectations for the Fed may be vulnerable to softer-than-expected US data, particularly today’s payrolls report and next week’s services ISM and consumer confidence figures. The September FOMC minutes and Fed speakers will provide further insight into the strength of the hawkish stance, while Swedish inflation, Canadian employment data and the latest SNB FX reserves are also in focus.