EUR/USD is pacing inside a cage built by the bond market. That market is so powerful that investors demand risk premia both for exposure to tech stocks and for France's fiscal and political turmoil. Investors have alternatives — and that shows up as a widening spread between French and German yields that prevents the euro from really stretching its wings.

France and Germany bond yield spread dynamics

To sustain its current debt load of roughly 120% of GDP, France would need a feat: shrink the budget deficit to around 2% of GDP, a level unseen since the 1970s. Protesters, meanwhile, are demanding relief from the high cost of living. That implies more spending, and the budget bill presented to the National Assembly is already under strain. Investors are selling European assets, which, in theory, should pressure EUR/USD. In practice, much of that decline in the euro has already occurred in August-October, and the very powerful bond market is starting to push back on the US dollar.

MUFG argues that if Democrats take control of Congress in early November, that would be an important factor weakening the greenback. Likewise, fading interest in AI, which had fueled US economic sentiment and channeled capital into US stocks, would remove a structural tailwind for the dollar. A burst S&P 500 bubble would therefore hit the greenback first.

Bear in mind that EUR/USD bears will not get Fed support before December. Futures markets do not price in a federal funds rate hike in October, and the next FOMC meeting is scheduled for late in the year.

German economic sentiment dynamics

If Democrats control Congress, they would likely block parts of Donald Trump's agenda, including his efforts to drive energy prices down. Yet neither his pledge not to strike Iran before the primaries nor the diesel deal with Russia has prevented Brent from climbing above $110/bbl. That trend pressures the euro as the currency of a net energy importer. The ZEW survey's first dip in sentiment since April only adds to that burden.

Thus, the US dollar is gradually playing through the trump cards it still has, looking for fresh growth drivers while worrying about a popping AI bubble. But France's fiscal and political crisis prevents the euro from mounting a full counterattack. In such an environment, it makes sense to watch the old, reliable guide — oil. It will likely help determine EUR/USD's next directional move.

Technically, the daily chart shows an ongoing battle for fair value at 1.1215. A fresh local high above 1.1235 would be a reason to buy, while a break below 1.1195 would open the way for short positions.