23.10.202611:37 Forex Analysis & Reviews: Paris unrest hits euro as army mobilized

French authorities are preparing for a new wave of protests on Saturday and are deploying the army to support police to prevent a repeat of last weekend's unrest and calm markets, which were rattled by the violence. The interior ministry said there will be 20% more police on the streets than a week earlier. For markets this signals that authorities take the risk seriously, but it also shows how tense the situation remains.

Recall what happened last Saturday. Protests against the rising cost of living drew more than 500,000 people and turned into looting and arson across the country. The interior ministry reported about 3,000 stores looted and 2,700 arrests. School and student protests had been running for three weeks beforehand, and the French issue had already become a headache for the euro, with the opposition unwilling to compromise with Macron's outgoing administration ahead of the election.

Markets reacted quickly to the unrest. On October 19, during the Asian session, the euro was sharply sold, and futures on French 10-year bonds fell as yields surged. The euro weakened versus most G10 currencies—a repeat of the familiar pattern in which bad news from France hits the single currency. The mechanism is simple: violence raises political risk, political risk jeopardizes budget passage, that makes French debt more expensive, and investors sell both bonds and the euro.

Pressure then intensified. On October 20, the spread of 10-year French yields over bunds reached 153 bp, the highest since October 2, and on Thursday the premium jumped 16 bp to 175 bp—the highest level since late 2011. French 10-year yields this week hit 5% for the first time since 2002. The market is also watching ratings: Moody's may cut France's rating as soon as today.

What could the new Saturday bring? The protests are billed as "Act II" of the movement for better public services and help with prices, and anger is aimed primarily at Macron, who half a year before the end of his term has never been so unpopular. Macron said authorities will only sanction protests organized by unions. He said the general recommendation was that there should be no demonstrations in the coming days. Tough measures have already drawn criticism from the left; MP Manon Aubry called them a historic blow to the right to protest.

I see two scenarios. If Saturday passes calmly, spreads could stabilize and give the euro a brief respite, although yields at 5% and the risk of a downgrade will remain. If unrest recurs, the market will get confirmation that a fractured parliament and an upcoming election make painful budget cuts very hard to enact, and the spread could push above 175 bp. Then the question of ECB intervention will return to the agenda, although about 70% of economists in recent polls rule out any form of intervention. The likely policy response would instead be more dovish guidance on rates, which would further weaken the euro.

I believe that while tension in Paris remains and Brent holds around $110, the euro will stay under pressure and France-to-Germany spreads will remain near highs. A calm Saturday will only slightly ease tension, whereas a repeat of the riots could send EUR/USD back to recent lows.

Technical picture for EUR/USD

Buyers need to reclaim 1.1230. Only that would allow targeting a test of 1.1260. From there one can reach 1.1300, but doing so without support from major players will be difficult. On the downside I expect serious buying only around 1.1200. If nobody shows up there, it would be sensible to wait for a new low near 1.1180 or to open longs from 1.1155.

Technical picture for GBP/USD

Pound buyers need to take the nearest resistance at 1.3402. Only that would allow targeting 1.3440, above which further gains will be hard. The far target is the 1.3465 area. On a decline, bears will try to seize control of 1.3365. If they succeed, a break of the range would hit bulls hard and push GBP/USD to a low near 1.3335 with scope to reach 1.3300.