The euro edged higher against the US dollar in early Asian trading on Friday (October 9), hovering around 1.1225. However, concerns over France's debt crisis could cap further upside for the currency pair.

French fiscal worries continue to weigh on the euro, with the France-Germany yield spread posting its largest weekly widening in decades. The spread between French and German 10-year bond yields recorded its biggest weekly increase in decades last week, as traders sold French bonds and rotated into safer German bunds.

French Prime Minister Lecornu's minority government announced a 54 billion euro savings plan last month to avert a catastrophic ratings downgrade or sovereign default. Fears over France's ability to control its budget deficit, combined with last week's sharp bond market selloff, have intensified concerns about a potential sovereign debt crisis in the eurozone. This in turn could exert short-term selling pressure on the shared currency.

A senior investment strategist at Mesirow Currency Management said: "The euro remains under pressure, limiting one of the main alternatives to the US dollar."

Fed Meeting Minutes Reveal Divisions, October Rate Hike Odds Fall to 17.7%

The FOMC meeting minutes showed that policymakers were divided in September over the case for raising rates, with "some participants" arguing that a hike was needed to curb the impact of energy and other price shocks, while the more hawkish core believed rates needed to rise to prevent emerging demand-driven inflation.

According to the CME FedWatch tool, the probability of the Fed raising rates by at least 25 basis points at its meeting later this month stands at 17.7%, down from about 38% a week ago. Market pricing puts the probability of a rate hike at the December meeting at 83%.

The sharp decline in October rate hike odds reflects recent weaker data and cautious remarks from Fed officials, which has undermined the interest rate support for the US dollar.

Brown Brothers Harriman: ECB Tightening Room Unlikely to Offset US Growth Advantage

Strategists at Brown Brothers Harriman noted that the ECB's recent policy moves and upcoming meeting minutes are unlikely to materially change the broader narrative for EUR/USD. They recalled that "at that meeting, the ECB voted unanimously to raise the policy rate by 25 basis points to 2.50%," and expect the minutes "will reinforce the case for further hikes, but given the recent surge in bond yields, the message looks somewhat stale."

The firm believes that "above-target eurozone inflation and a more solid growth outlook give the ECB room for further rate increases," with the swap curve "implying nearly 75 basis points of tightening to 3.25% over the next twelve months." In their view, "this limits policy divergence with the Fed and the drag on EUR/USD."

However, they warned that "stronger US growth momentum relative to the eurozone, along with the worsening French budget crisis, tilts the risks for EUR/USD to the downside."

Waller's Hawkish Remarks Support Dollar, but Flexible Pace Keeps Dollar Bulls Cautious

Fed Governor Waller made notably hawkish comments, emphasizing the "need for more rate hikes but flexibility on pace," and that further action need not come at consecutive meetings, signaling a higher terminal rate but a less mechanical path.

Persistent inflation drivers such as AI construction and energy shocks, combined with a strengthening economy and a "solid and stable" labor market, reinforce the case for keeping policy restrictive to protect inflation expectations.

Overall, the remarks point to continued support for the US dollar, even as the pace of future actions becomes more data-dependent.

Summary

The euro edged slightly higher against the US dollar in early Asian trading on Friday, but French fiscal concerns are limiting upside room. The France-Germany 10-year bond yield spread posted its largest weekly widening in decades last week, as traders sold French bonds and shifted into German bunds. French Prime Minister Lecornu's minority government announced a 54 billion euro savings plan to avoid a ratings downgrade or sovereign default. The Fed meeting minutes showed policymakers were divided over the case for rate hikes, with October hike odds falling to 17.7% and December odds at 83%. Brown Brothers Harriman believes the ECB's tightening room is unlikely to offset the US growth advantage, and the French budget crisis tilts EUR/USD risks to the downside. Waller's hawkish remarks support the dollar, but the flexible pace keeps dollar bulls cautious. Going forward, attention should be paid to France's fiscal situation, the France-Germany yield spread, Fed officials' speeches, the Michigan consumer sentiment index, and ECB policy signals. If French pressure spreads or the Fed maintains its hawkish stance, the euro could weaken further; if France's situation stabilizes or October rate hike expectations continue to cool, the euro could find some relief.

(EUR/USD daily chart, source: Yihuitong) As of 10:24 Beijing time, EUR/USD was at 1.1224/25.