EUR/USD rallied sharply on Tuesday, but the pair gave back all of those gains Wednesday and now looks set to make new longer-term lows. Both yield differentials and technical indicators suggest the risks are still tilted to the downside.

In Europe, government bond yield spreads between Germany and France, Italy and Spain widened again. Investors worry that fiscal and election uncertainty in France could spread to other parts of the region, and that concern is keeping bearish sentiment toward the euro intact. The spreads may widen further because relief for French bonds looks unlikely. A senior euro zone official said there has been no contagion from French yields so far, and Bank of France head Emmanuel Moulin said France doesn't need help from the ECB.

US-German 2-year and 10-year yield spreads are widening, which increases the dollar's yield advantage over the euro. These spreads have widened sharply since early September and are holding near their recent wides, which adds to the pressure on EUR/USD.

The technical picture is also bearish. The pair is consolidating its drop from the September 25 daily high. Daily and monthly RSI readings show downward momentum, the 15-month Bollinger bands are widening, and the pair is holding below its downward-sloping 10- and 21-day moving averages.

Several support levels could be tested next: the 50% retracement of the 1.0125–1.2084 rally (about 1.1105), the May 2025 monthly low and the psychological 1.1000 level. If those supports break, the 1.0500–1.0600 range comes into focus.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)