Institution: French government bond sell-off may drag the euro lower

(1) Chris Turner from ING stated in a report that the sharp sell-off of French government bonds could lead to a further weakening of the euro. (2) Investors believe that any action the European Central Bank takes to cope with the bond market sell-off could mean a significant reduction in further policy tightening, or even no further tightening, which would drag down the euro. (3) In an extreme scenario, the European Central Bank may use its Transmission Protection Instrument to buy bonds, which would be very unfavorable for the euro. (4) Data shows that the yield spread between 10-year German and French government bonds has risen to about 149 basis points, the highest level since 2012. (5) Overall, pressure in the French bond market is being transmitted to the exchange rate through monetary policy expectations; going forward, attention should be paid to European Central Bank policy statements and the trend of the France-Germany yield spread.