Euro: Bullish reversal builds above support – Scotiabank

Scotiabank’s Global FX Strategy team notes EUR/USD is supported by modest narrowing in front-end Eurozone–US spreads following dovish-leaning comments from Fed Chair Warsh. French OAT/Bund spreads remain wide but are seen as a limited driver for the Euro. The bank estimates fair value at 1.1285 and highlights a potential bullish weekly reversal if late-week gains are sustained.

Euro lifts on spread dynamics and charts

"The French government bond rout has steadied over the past week, holding the 10Y OAT/Bund spread around 135-140bps – wide and wider than other, similarly-rated EZ sovereign credits but still well below the peaks seen during the 2011 Eurozone bond crisis."

"The EUR’s relationship with Eurozone sovereign spreads tends to be episodic and other factors appear to be a more significant influence on FX currently. Warsh’s dovish by omission comments on the policy outlook earlier have allowed for a minor narrowing in front-end EZ/US spreads and lifted the EUR."

"At the margin, OAT tensions help tilt ECB risks away from hiking at the end of the month but are unlikely to influence the December decision (a 25bps hike is all but fully priced in). We estimate EUR/USD fair value at 1.1285."

"Bullish – A solid rebound from long-term retracement support in the low 1.11s (50% retracement of the EUR’s 2025/26 rally from the 1.01 area) earlier this week and gains through noted resistance at 1.1240/50 are setting the EUR up for a potentially bullish weekly reversal."

"This will be contingent the EUR sustaining late week gains through the close of business today. Intraday support is 1.1245/50"