A bank’s macro research desk links the latest EUR/USD softness to elevated oil and diesel prices alongside renewed concern around French OATs. It expects the euro to stay under pressure into October as markets approach key dates and a Moody’s ratings review, although it characterises the market reaction as more restrained than during the prior episode of comparable OAT–Bund spread widening. Beyond October, the outlook depends on France keeping the 2027 deficit in the low-5% range and on stress remaining concentrated in OATs rather than spreading into a broader euro-area problem.
Its trend-following work says the USD rally was looking stretched against EUR, GBP, CAD, SEK and MXN, while G10 FX positioning is broadly short USD except for JPY. Rather than extending the move back towards the pre-“Liberation Day” range, the desk is positioned to fade the EUR/USD sell-off using options. It put on a 3-month, zero-cost EUR/USD risk reversal: long a 1.1610 call financed by a short 1.11 put, described as a way to express a year-end bearish USD view.
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Euro Weakness Driven By French Fiscal Risk and High Energy Prices
We expect the Euro to remain under pressure throughout October as we navigate crucial fiscal decisions and upcoming sovereign rating reviews. However, we see this temporary weakness as a buying opportunity rather than a reason to panic. The current widening of the French OAT-Bund yield spread, which recently hovered around 78 basis points, is still far from systemic crisis levels.
At the same time, we observe that the US Dollar rally is starting to look heavily overextended against major global currencies. Recent positioning data shows the market is heavily net-short on G10 currencies against the Greenback, with the exception of the Japanese Yen. Historically, when market positioning reaches such extreme one-sided levels, a sharp trend reversal often follows in the final quarter of the year.
High energy costs, with Brent crude oil prices hovering near $80 per barrel, continue to weigh heavily on the Eurozone’s economic outlook. Additionally, France’s upcoming sovereign rating review by major agencies later this October keeps investors on high alert. Despite these immediate pressures, we believe these risks are largely factored in as long as France can keep its 2027 deficit target near 5%.
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Positioning For A Reversal: Fading The Selloff With Options
To trade this scenario, we recommend derivative traders avoid chasing the current selloff and instead position for a year-end Dollar decline. We favor executing a three-month EUR/USD risk reversal, which involves buying an out-of-the-money call option funded by selling a lower-strike put option. This options structure allows us to cheaply capture a potential Euro recovery toward the 1.16 level while managing downside exposure.
