FX Daily · Tuesday, 20 October 2026
Euro: the French premium outweighs rates
By Walid Qairmi, Macro Edge, written by AI · data as of 08:11 CEST
The dollar gained little from Monday's rise in US long-term yields: the 10-year added 6 bp to 5.15%, the DXY only 0.15% at the New York close. The gaps between currencies stem from local shocks, and the euro pays the highest price: the OAT-Bund spread touched 158 bp intraday, the euro finished last in the G10 and EUR/GBP fell to 0.8420, its lowest in the past thirty sessions. The National Assembly's vote on the revenue side of the 2027 budget, scheduled for today at an unconfirmed time, dominates the European session, ahead of Moody's review on Friday. On the other side, UK employment surprised to the upside with unemployment at 4.7% against 4.9% expected, and the Canadian dollar is supported by WTI above $100 and a BoC hike priced at around 18 bp. Our bias remains bearish on the euro, especially against sterling, as long as the French spread does not fall back below 140 bp.
What moved the market
France reopens a risk premium on the euro
The facts
The 10-year OAT-Bund spread closed on Monday at 147 bp after an intraday high of 158 bp, the highest level since the sovereign debt crisis according to ING. On Saturday, around 550,000 people demonstrated in France, including 110,000 in Paris, with more than 1,200 arrests according to the Interior Ministry. The minority Lecornu government is seeking €54bn of savings in the 2027 budget, and the National Assembly votes today on its revenue side. Moody's delivers its review of France on Friday 23 October.
The market
The euro ended Monday last in the G10, down 0.44% according to Saxo. At the ECB fixing, EUR/USD fell 0.25% to 1.1225, 3.4% below its 9 September high; the New York close puts it at 1.1215. EUR/GBP lost 0.21% to 0.8420, its lowest in the past thirty sessions. The CAC 40 was down 1.2% early in Monday's session.
Our reading
The simultaneous fall in EUR/USD and EUR/GBP points to a euro-specific factor, since both sterling and the dollar gained against it. Our reading is that the French premium is grafted onto a familiar ECB dilemma: September HICP reached 3.8%, of which 1.71 points came from energy, and a faster rate hike would increase the burden on the eurozone's most fragile borrowers. The market prices a hold on 29 October at around 99% and a hike in December; a lasting widening of spreads would make this path more costly. ING estimates EUR/USD fair value between 1.137 and 1.139: the gap with the 1.1225 rate suggests a risk discount that rate differentials do not explain.
pounds per euro (l.), dollars per euro (r.)
Sources : ECB, Macro Edge Terminal (FORCE panel) 19/10/2026.
% (l.), % (r.)
Sources : US Treasury (DGS10), OECD (IRLTLT01DEM156N), Macro Edge Terminal (SPRDS panel) 01/10/2026.
EUR/GBP and EUR/USD. EUR/USD and EUR/GBP are falling together, by 3.4% and 2.1% since their September highs. The common move points to the euro, but a correlation of 0.36 does not establish its cause.
US 10-year and 10-year Bund. The 10-year Treasury-Bund spread widened from 156 bp in August to 182 bp in September on a monthly average basis, with the Bund up 28 bp and the Treasury up 54 bp. The long-term rate differential remains favourable to the dollar, and the euro's discount will not close by this route without an easing of French spreads.
Treasuries pay a term premium, the dollar collects little of it
The facts
The US 10-year gained 6 bp on Monday to 5.15%, the 2-year 3 bp to 4.77%, and the 2-10 year slope went from 35 to 38 bp. The 30-year finished at 5.48% and the 10-year real yield around 2.77% according to Saxo, while the Fed observes its blackout ahead of the 27 and 28 October FOMC. The October NAHB index fell to 29, its lowest since June 2012, a figure reported by the press and not verified at source. The Nasdaq gained 1.11% on a rebound in AI stocks, while the equal-weighted S&P index lost 0.32%.
The market
The DXY gained only 0.15% at the New York close. USD/JPY held around 158.50 in Asia this morning, above its fixing of 158.24, and the VIX fell 7.75% to 18.44. Rate-sensitive sectors, utilities, real estate and banks, finished lower.
Our reading
The rise comes from the long end and the real yield: the 10-year breakeven remains at 2.35% on the October average, while the real yield went from 2.44% in August to 2.93% in September. A rise in long-term yields without a Fed message or a revision of inflation expectations looks like a term premium. ING attributes the dollar's weak traction to AI concerns, which are said to be damaging its safe-haven status; Monday's session is consistent with this diagnosis without proving it. As long as the front end does not rise, the dollar retains limited upside against currencies that have their own support.
% (l.), % (r.)
Sources : US Treasury (DGS2, DGS10), Macro Edge Terminal (CURV panel) 19/10/2026.
% (l.), % (r.)
Sources : Federal Reserve (T10YIE, DFII10), Macro Edge Terminal (5Y5Y panel) 01/10/2026.
US 2-year and US 10-year. On Monday, the 10-year rose 6 bp and the 2-year 3 bp: the 2-10 year slope went from 35 to 38 bp. The steepening comes from the long end, in the middle of the Fed's blackout period, and therefore without any monetary policy message to trigger it.
10-year breakeven and 10-year real yield (TIPS). The 10-year real yield rose from 2.44% in August to 2.93% in September on a monthly average basis, while the breakeven stayed between 2.31% and 2.36%. The rise in long-term yields comes from the real yield, which is consistent with a term premium; inflation expectations have not moved.
The loonie holds thanks to oil and the BoC, despite a softer CPI
The facts
Canadian inflation for September came in at 3.1% year on year against 3.2% expected, after 3.0% in August, according to Statistics Canada; excluding gasoline, it slowed to 2.2% from 2.4%, with gasoline up 27.8%. November WTI settled at $103.66 (+2.22%), its highest since 15 September, while December ICE Brent finished at $109.55 (−0.28%). In the Alberta referendum, more than 76% of voters chose to remain in Canada according to early results. Around 18 bp of hikes are priced for the BoC on 28 October, whose rate has been at 2.25% for nearly a year.
The market
USD/CAD fell 0.61% at the ECB fixing to 1.4074, its lowest since 23 September and 1.3% below its 12 October level. This fixing predates the CPI and the referendum, so the exact driver of the decline is not verified. According to available sources, the below-consensus CPI did not push back BoC pricing, estimated at around 80% probability of a hike in swaps against 30% on Friday, a figure whose timestamp remains uncertain.
Our reading
Traders seem to read Canadian inflation through its headline figure, driven by energy, and to overlook the ex-gasoline figure. The removal of the Alberta risk takes away a tail premium, and WTI above $100 improves the country's terms of trade. The weak point is the BoC itself: with ex-gasoline inflation at 2.2%, a hike on 28 October would respond to a supply shock that it can choose to look through. The correlation between USD/CAD and Brent is zero over 60 sessions, which rules out making oil the sole explanation.
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Pricing gap
The front end prices tightening in response to a supply shock, while demand and wages are showing signs of fatigue. If Kevin Warsh's Fed chooses to look through energy, December pricing has room to fall, and the dollar would lose the short-rate support that currently offsets the loss of its safe-haven appeal. The 2-year's retreat from an intraday 4.87% on 14 October to 4.77% suggests that this adjustment has begun, without having gone far.
The narrative
The market prices a Fed that has not finished hiking: a hold on 28 October at around 85% according to FedWatch, then a hike in December, with a probability ranging from 63% to around 90% depending on the source, a discrepancy we have not been able to resolve. The 2-year at 4.77% stands 77 bp above the top of the fed funds range (4.00%). The minutes of 7 October show that most members consider a further hike by the end of the year likely.
The data
The inflation that justifies this pricing is mainly energy-driven: headline CPI at 3.72% in September, core at 2.57%, 10-year breakeven stable at 2.35%. The labour market is slowing, with 29,000 jobs created in September, unemployment at 4.2% and average hourly earnings at 3.02% year on year against 3.85% a year earlier. Core PCE, at 3.01% in August, nonetheless remains one point above target.
What closes it
The FOMC statement on 28 October at 19:00 and Kevin Warsh's press conference at 19:30, Paris time, will settle the matter; Warsh has so far refused to prejudge either October or December. Until then, Thursday's jobless claims and Friday's flash PMIs, with services expected at 58.0 after 58.8, are the only tests. A firm PMI would validate the pricing; a further deterioration in employment would erode it.
% year on year (l.), % year on year (r.)
Sources : BLS (CPIAUCSL, CPILFESL), Macro Edge Terminal (OFFI panel) 01/09/2026.
% of the labour force (l.), thousands of jobs per month (r.)
Sources : BLS (UNRATE, PAYEMS), Macro Edge Terminal (CLAIMS panel) 01/09/2026.
Headline CPI and Core CPI. Headline CPI reached 3.72% in September and core 2.57%: a 115 bp gap that reflects oil. Core rose from 2.45% to 2.57% in one month, the only solid argument for a Fed that remains hawkish.
Unemployment rate and Job creation (NFP). Payrolls fell to 29,000 in September and to 51,000 on a three-month average, with unemployment at 4.2%. This labour market sits poorly with a central bank that would hike again in December.
Currency by currency
The biases taking shape
EUR · A political discount that rates do not offset
EUR/USD stands at 1.1225 at Monday's fixing, 48 pips from its lowest of the past thirty sessions, 1.1177 on 7 October. The long-term rate differential does not help: the 10-year Treasury-Bund spread widened by 26 bp in September, to 182 bp. The European session will hinge on the National Assembly vote, whose time is not confirmed, then on Moody's review on Friday. The 11:00 ZEW, expected at 31.6 for German expectations after 34.7, will carry less weight.
Inflation data offer the ECB no reassurance. September HICP reached 3.8% and German PPI reportedly rose 1.9% on the month against 0.8% expected, a figure published this morning according to a secondary source and not verified with Destatis. Our reading is that an ECB forced to hike in December while sovereign spreads widen gives the euro more fragile rate support than the BoE gives sterling.
- Bias
- Baissier · confidence average
- Invalidation
- An OAT-Bund spread back below 140 bp at the close, or EUR/USD above 1.1253 (16 October fixing) with a stable US 2-year.
GBP · Unemployment falls and the BoE runs out of alibis
The ONS this morning published ILO unemployment at 4.7% for the three months to August, against 4.9% expected and 4.9% the previous month. Regular pay accelerated to 3.7% (3.6% expected), total pay slowed to 3.7% (3.8% expected). The rest of the report is less flattering: 111,000 fewer payrolled employees over the year and 691,000 vacancies, down 21,000 over the quarter. Sterling's reaction at 08:00 could not be verified before the cut-off; GBP/USD was trading around 1.3317 in Asia.
The figure supports a BoE hike to 4.00% on 5 November, expected by 54 of the 63 economists polled by Reuters and priced at 94% on Polymarket, a prediction market and not an OIS. September CPI, due tomorrow at 08:00, is expected at 3.4% after 3.1%. The 10-year gilt yields 5.24% on the September average, only 5 bp below the Treasury, which limits sterling's advantage against the dollar; it plays out mainly against the euro. BBH judges BoE tightening to be overpriced, the main counterpoint to this reading.
% of the labour force (l.), % year on year (r.)
Sources : ONS (MGSX, KAB9), Macro Edge Terminal (OFFI panel) 01/07/2026.
Unemployment fell back to 4.7% after a series high of 5.2%, which removes the BoE's main argument for patience. The wage series in the chart (3.13%) follows a different definition from the regular pay published this morning by the ONS (3.7%).
- Bias
- Haussier · confidence average
- Invalidation
- September CPI at 3.1% or lower tomorrow, or EUR/GBP back above 0.8461 (15 October fixing).
CAD · BoC pricing survives a softer CPI
USD/CAD broke 1.41 at Monday's fixing, at 1.4074, well away from the 1.4262 ceiling reached on 8 and 12 October. The move predates the CPI and the Alberta referendum, and its exact driver could not be isolated. The CPI published afterwards, at 3.1% against 3.2% expected, should have weighed on the loonie; BoC pricing nevertheless held according to available sources, and the Alberta vote removed a tail risk.
Scotiabank expects a 25 bp hike on 28 October; ING considers the December hike fully priced and nonetheless targets 1.420 at month-end, a reading opposite to ours. Our bias rests on WTI above $100: a pullback in oil would weaken BoC pricing, already debatable with ex-gasoline inflation at 2.2%.
- Bias
- Haussier · confidence average
- Invalidation
- USD/CAD above 1.4161 (16 October fixing), or WTI back below $100 with less than 12 bp of hikes priced for 28 October.
JPY · An intact carry trade, a political ceiling
USD/JPY finished Monday around 158.50 in New York (158.24 at the ECB fixing), 35 pips from its high of the past thirty sessions, 158.85 on 24 September. The pair reacted little to the 6 bp rise in the US 10-year: the correlation of their daily changes is only 0.16 over 60 sessions. Finance Minister Katayama repeated on 15 October that Japan was ready to act again, which had brought the pair back towards 157.6; according to Saxo, this threat is holding back new yen selling.
On Monday, Ueda told Parliament that underlying inflation was “quite close” to 2%. Aggregators put the BoJ rate at 1.5% by December against 1.25% today, pricing not verified at primary source, and the 30 October meeting comes with a quarterly report. With a 224 bp gap on the 10-year, the carry trade remains favourable to the dollar, and only Tokyo and the BoJ can counter it.
% (l.), % (r.)
Sources : US Treasury (DGS10), OECD (IRLTLT01JPM156N), Macro Edge Terminal (SPRDS panel) 01/10/2026.
The 10-year gap between Treasuries and JGBs widened from 180 bp in May to 224 bp in September on a monthly average basis, despite a 40 bp rise in the JGB yield. The rate differential supports USD/JPY; the ceiling comes from Tokyo and the BoJ.
- Bias
- Neutral · confidence faible
- Invalidation
- A sustained break above 158.85 without a reaction from Tokyo would reopen the way for the carry trade; a return below 157.6 would signal that the BoJ or the Finance Ministry is taking back control.
The scenarios
National Assembly vote on the revenue side of the 2027 finance bill (time not confirmed)
| If | Then |
|---|---|
| Revenue side adopted | OAT-Bund spread ↓ towards 140 bp → EUR probably relieved, especially against GBP → Sensitive pairs: EUR/GBP, EUR/USD → Moody's on Friday remains the second test |
| Revenue side rejected | OAT-Bund spread ↑, test of the 158 bp intraday high → EUR under pressure → EUR/USD towards 1.1177, the 7 October low → EUR/GBP below 0.8420 |
| Vote postponed or unclear outcome | Risk premium unchanged until Moody's → EUR/USD at the bottom of its recent range → Tomorrow's UK CPI takes over as the driver of EUR/GBP |
Paris time
Today's agenda
| Time | Event | Consensus | Précédent | FX sensitivity |
|---|---|---|---|---|
| 11:00 | Germany, October ZEW: expectations | 31.6 | 34.7 | |
| 11:00 | Eurozone, October ZEW: expectations | 24.2 | 25.8 | |
| 14:30 | United States, housing starts (September) | 1.30M | 1.275M | |
| 14:30 | United States, building permits (September) | 1.39M | 1.403M | |
| — | France, National Assembly vote on the revenue side of the 2027 finance bill (time not confirmed, afternoon likely) | n/a | n/a |
Invalidation
What would change ourmind
Our bearish reading on the EUR, based on the French risk premium, would be called into question by:
- A 10-year OAT-Bund spread back below 140 bp at the close, after today's vote.
- A Moody's review on Friday with no change to the rating or outlook, followed by EUR/USD above 1.1253.
- UK September CPI at 3.1% or lower tomorrow, bringing EUR/GBP back above 0.8461.
- A fall in the US 2-year below 4.70% that lifts EUR/USD despite France: the front end would then become the dominant driver again.
In short
What you need pick
The regime is one of local shocks: the rise in US long-term yields, driven by the real yield, does little for the dollar, and currencies are sorting themselves out on their own risks. The euro bears the French premium, while sterling and the Canadian dollar benefit from central banks that the market expects to hike. The main risk is a rejection of the revenue side in the Assembly, which would push the OAT-Bund spread beyond 158 bp before Moody's on Friday. The next catalyst is tomorrow's UK CPI at 08:00, expected at 3.4%.
Taken at 08:29, Paris time
The markets in numbers
| Price | 1 session | 1 month | Since 31/12 | |
|---|---|---|---|---|
| Currencies | ||||
| EUR/USD | 1.1225 | −0.25% | −2.05% | −4.47% |
| USD/JPY | 158.24 | +0.14% | +0.23% | +1.00% |
| GBP/USD | 1.3331 | −0.04% | −0.10% | −1.00% |
| USD/CHF | 0.8250 | +0.13% | −0.08% | +4.08% |
| USD/CAD | 1.4074 | −0.61% | +0.45% | +2.79% |
| AUD/USD | 0.6986 | +0.39% | −1.89% | +4.53% |
| NZD/USD | 0.5671 | +0.13% | −0.68% | −1.63% |
| EUR/GBP | 0.8421 | −0.21% | −1.95% | −3.50% |
| Dollar index (Macro Edge calculation) | 101.83 | +0.11% | +1.30% | +3.65% |
| Rate | ||||
| US 2-year | 4.77 % | +3 bp | +1 bp | +130 bp |
| US 10-year | 5.15 % | +6 bp | +14 bp | +97 bp |
| Commodities | ||||
| Brent | 127.43 | +6.17% | +28.60% | +101.60% |
| WTI | 96.88 | −1.21% | +6.25% | +67.01% |
| Gold (monthly average) | 4,335 | n/a | −1.92% | +0.48% |
Changes in % for prices, in basis points for rates. Each line carries the date of its latest official release: ECB reference rates (around 4 pm the day before), US Treasury, EIA (spot prices, a few days' lag), IMF for metals (monthly averages). The dollar index is calculated by Macro Edge from ECB rates, using the historical index weights. Official sources, via the Macro Edge Terminal.
Sources
- 1. ONS, Labour market overview, UK: October 2026, 2026-10-20.
- 2. Statistics Canada, Consumer Price Index, September 2026, 2026-10-19.
- 3. Eurostat (via eunews), Euro area and EU September inflation confirmed up at 3.8 per cent, 2026-10-16.
- 4. Federal Reserve, Federal Reserve issues FOMC statement, 2026-09-16.
- 5. ING THINK, Rates Spark: French spreads singed by violent protests, 2026-10-19.
- 6. ING THINK, FX Daily: AI jitters have damaged USD safe haven appeal, 2026-10-19.
- 7. ING THINK, China's GDP edges higher as activity stabilised in September, 2026-10-20.
- 8. CNBC, France hit by worst unrest in years, 2026-10-19.
- 9. CappNotes, Closing Look — Monday, October 19, 2026, 2026-10-19.
- 10. Saxo, Asia Market Quick Take – 20 October 2026, 2026-10-20.
- 11. Nation Thailand, Brent crude settles at $109.55 a barrel on Monday, 2026-10-19.
- 12. investinglive, Bank of Canada preview: Scotiabank expects a 25 bp hike, 2026-10-19.
- 13. CBC, The Globe and Mail, Alberta referendum of 19 October: early results, 2026-10-19.
- 14. Reuters (via Euronext), ECB to hike rates again in December as inflation almost doubles 2% target: Reuters poll, 2026-10-08.
- 15. Bloomberg (via Swissinfo), UK Inflation Can Seal the Deal on the BOE's November Rate Hike, 2026-10-19.
- 16. Arab News Japan, FXStreet, Ueda before Parliament, 2026-10-19.
- 17. Bloomberg, Katayama renews warnings on the yen, 2026-10-15.
- 18. ActionForex, Eco Data 10/20/26, 2026-10-20.
This publication is provided for information purposes only and is neither investment advice nor a recommendation to buy or sell any financial instrument. Written with the help of artificial intelligence (Claude, Anthropic) and published under the editorial responsibility of Walid Qairmi, publication director of Macro Edge. Figures are facts, sourced and dated; biases and scenarios are the author's opinions as of the publication date and may change without notice. The author is a student and keeps learning every day. Conflicts of interest: the author may personally take positions on some of the ideas presented; Macro Edge receives no compensation from any broker, issuer or third party for this publication.
