Yields on French 10-year bonds rose above 5% at the end of October for the first time since 2002. They later eased a little: at the November 6 auction, France placed 10-year paper at 4.74% versus 4.93% previously. But the relief looked fragile. ECB Governing Council member Jose Luis Escriva explained how the regulator views the move. "Widening spreads should be regarded as a positive phenomenon," he said. He was asked specifically about France but broadened his answer: in his view, budget sustainability problems exist in quite a few European countries.
His logic is the following. In past crises, similar market moves triggered corrective action and made public finances more resilient. Therefore, he called current events healthy and added that it is good when markets price that risk. There are two beneficiaries. One is disciplined borrowers whose bonds gain relative value compared with peers, and the other is the ECB itself, which will not have to deploy transmission support tools. The losers are also clear: France, with a fractured parliament and budget targets that could fail if the government falls; and Belgium and Italy, whose debts have long been a subject of debate.
The tone has shifted noticeably over three weeks. On October 20, Olli Rehn said French bond spreads widened due to both common and country specific factors and that all eurozone countries must control deficits. On October 16, Nagel did not see a new financial crisis in Europe, while on October 29, Lagarde limited herself to saying the ECB has instruments to respond if markets threaten monetary policy transmission. Then the message was reassurance; now it is an open endorsement of pressure.
The external backdrop, however, worsens the situation. U.S. CPI for October came in above forecasts: headline +0.4% versus +0.3%, core +0.3% versus +0.2%—and that is already the third month in a row. Two-year U.S. Treasury yields jumped 17 basis points in one day to a 19-month high, while 10-year yields returned to ~4.87% after 5.02% on October 28. This is the "global rise in yields" that makes highly indebted countries look particularly vulnerable. Weakness in intermediate-term U.S. bonds points to further yield increases.
Lagarde on October 29 explained the rise in long yields by inflation expectations and the path of rates and bond issuance by large tech firms building data centers. It follows that capital demand from AI lifts the cost of borrowing everywhere, and the Fed responds more aggressively. The dollar benefits from this chain, while the euro loses out, remaining hostage to the policy rate gap: the Fed at 3.75–4.00% versus the ECB deposit rate at 2.50%.
For the ECB the problem is compounded by the market already pricing a move to 2.75% on December 17. Hiking while yields in the most indebted countries are rising on their own risks, even wider spreads. I read Escriva's words as a signal: do not count on regulator support until a real failure of monetary policy transmission hits Paris.
Technical picture for EUR/USD
Buyers should think about taking 1.1170. Only that would allow a test of 1.1200. From there a move to 1.1220 is possible, but doing so without support from major players will be difficult. On a decline I expect significant buyer activity only around 1.1140. If nobody appears there, it would be prudent to wait for a fresh low at 1.1110 or to open longs from 1.1080.
Technical picture for GBP/USD
Pound buyers need to take the nearest resistance at 1.3325. Only that would allow a move to 1.3355, above which further progress will be difficult. The farther target is 1.3377. On a drop, bears will try to seize control at 1.3295. If they succeed, a range break would inflict serious damage on bulls and push GBP/USD to 1.3270 with a prospect of extending to 1.3240.
