Euro-Dollar "Hanging by a Thread" - Soc Gen

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The "euro hangs by a thread," says Kenneth Broux, strategist at Société Générale, at the end of an eventful week for the single currency.

Euro-Dollar is down 1.35% on the week, "and skidded below 1.16 for the first time since 27 August," notes Broux.

He explains that because the exchange rate sank below key support levels, "technically the currency is in jeopardy of a bigger drop to 1.14."

A driver of the weakness is the yawning gap that has grown between French government bond yields and those of Germany, signalling increased anxiety over France's financial outlook.

The trigger for the move was the resignation of the Prime Minister Lecornu on Monday, and Broux warns that euro-dollar will remain pressured until that gap between German and French bonds falls back to levels consistent with political stability.

"A successor to Lecornu will supposedly be nominated today after consultations at the Elysee. A confidence vote could in theory take place next week, followed by budget discussions," says Broux on the next steps in France.

However, the euro's weakness is not linked to France alone, as economic data out of Germany this week disappointed and cast doubts on the ability of the new government's policies to revive the economy.

It "served as a reminder for the government to do more to deliver growth enhancing measures and strengthen competitiveness," says Broux.

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This week J. Safra Sarasin, the Basel-based private bank, told its clients "a significant improvement of economic activity in the euro area will be needed for the euro to move meaningfully higher from here."

The call puts a widely held 1.20 year-end target for EUR/USD amongst institutional analysts in doubt.

"Euro area growth continues to stagnate. Hence a significant improvement of economic activity in the euro area will be needed for the euro to move meaningfully higher from here," says Claudio Wewel, FX Strategist at J. Safra Sarasin.

That boost could yet arrive, with J. Safra Sarasin predicting that "the historic debt-financed German infrastructure package worth €500BN, which is set to be spent over the next twelve years, along with a considerable increase in defence spending, improves the medium-term growth outlook for Germany and the euro area."

Wewel expects the positive effects on activity to become visible in 2026, "which should allow the euro to embark on another leg higher."