The Euro (EUR) is up a modest 0.2% against the US Dollar (USD) but lagging most of the G10 currencies in an environment of broad-based USD weakness, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Markets focus on French politics ahead of confidence vote Thursday

"The euro area’s industrial production figures came in better than expected but still contracted in August and the final CPI print for France was unchanged at 1.2% y/y. The EUR’s drivers have shifted from fundamentals to sentiment, owing to French political concerns, with a clear moderation in EUR/spread correlations (21 day, rolling) and an impressive strengthening in the EUR’s correlation to its 3M risk reversals."

"The latter have rebounded, repricing a modest premium for EUR calls over puts as markets have breathed a sigh of relief over French PM Lecornu’s successful negotiations with the Socialist Party ahead of Thursday’s no confidence vote put forward by Marine Le Pen. The FranceGermany 10Y yield spread has narrowed considerably but is likely to remain in focus as the Socialist Party support was won on the back of a suspension of the 2023 pension reform in which the retirement age was raised from 62 to 64."

"The (moderately) bearish RSI is pulling back up toward the neutral threshold at 50, reflecting the EUR’s tentative recovery from recent lows in the mid-1.15s. The EUR is threatening a break of the descending trendline drawn from the July highs, which – despite broken – has offered considerable congestion over the past month. We remain neutral absent a break of the 50 day at 1.1691 and look to a near-term range bound between 1.1580 and 1.1680."