Euro awaits PMIs first, then France’s credit rating over the weekend

• 1.1250 remains out of reach for EUR/USD as France's 10-year yield exceeds 5%.
• Four October rebounds leave a sequence of lower highs.
• Friday brings Moody's review of France's credit rating.

5% was breached by France's 10-year government bond yield on Wednesday. It was the first such move since 2002, yet the Euro barely reacted. Trading just below 1.1250, EUR/USD has recorded four rallies since 2 October, each peaking below its predecessor. France's yield spread is weighing on the currency. The interest rate differential with the US offers no offset: both the Fed and the European Central Bank (ECB) are expected to leave rates unchanged in October before raising them in December.

1.6 points: France's extra cost over Germany for 10-year borrowing

At about 1.6 points, the spread between French and German 10-year yields reached its widest since 2012. France's yield briefly exceeded 5% before retreating below that level, while Germany's stood near 3.4%. Five-year insurance against French debt default now costs more than at any time since 2013. Government debt is approaching 120% of the economy. Having been delayed by more than 2K amendments, parliamentary debate on the 2027 budget resumes on 27 October.

The burden of a widening French spread extends to the Euro as a whole. It increases the risk of the ECB having to choose between its inflation objective and a member country's bond market. Created in 2022 to address that dilemma, the ECB's Transmission Protection Instrument (TPI) remains unused. On 14 October, ECB President Lagarde said the solution for France must come domestically, through its own fiscal policy.

Political tensions also account for part of the spread. Partial curfews have followed student protests in Paris, Bordeaux and Nice. Troops are scheduled to assist police at Saturday's planned marches, a day after Moody's assessment of France's rating.

December is the next expected shift in the EUR/USD rate gap

A roughly 95% probability of an ECB hold on 29 October is priced in by traders. Following increases in June and September, the deposit rate stands at 2.50%. September inflation in the euro area reached 3.8%, including an 18.9% year-on-year rise in energy prices. Excluding energy, food, alcohol and tobacco, inflation was 2.5%. Higher interest rates offer little remedy for energy costs driven by the US-Iran war.

With energy inflation still elevated, ECB Chief Economist Lane urged caution over further policy moves on Wednesday. Bundesbank President Nagel said on 16 October that another increase could not be ruled out. The Fed's rate range stands at 3.75%-4.00%, with prediction markets assigning a near 86% probability to no change on 28 October. Both central banks are expected to hold in October and act in December, leaving no expected shift in the US-euro area rate gap before then. Chief Economist Lane also argued that greater use of the Euro beyond Europe could support the ECB's control of prices. His remarks came as the currency's largest risk originated within the euro area itself.

Friday's PMIs precede Moody's review and weekend rating risk

Thursday's schedule includes Bank of Italy Governor Panetta at 12:15 GMT, followed by the euro area's preliminary consumer confidence release at 14:00 GMT. The reading is expected to fall to -17 from -16.5. On Friday at 08:00 GMT, Hamburg Commercial Bank (HCOB) Purchasing Managers Index (PMI) releases are forecast to show manufacturing at 52.8, against 52.9 previously, and services at 52.8, down from 53.0. ECB Executive Board member Cipollone is due to speak at 14:00 GMT.

S&P Global's US PMIs are due at 13:45 GMT on Friday. Forecasts of 55.6 for manufacturing and 57.9 for services exceed all the expected euro area readings. Having reached an 18-month peak near 103.00 in October, the Dollar Index is now just below 102.00. EUR/USD has derived little support from that Dollar weakness. Moody's assessment of France falls on the same day as the PMI releases. Under EU rules, agencies must publish sovereign rating decisions after European markets close. EUR/USD will therefore trade the PMIs before the rating decision arrives, with that decision in place when trading opens on Monday.

1.1250 resistance frames EUR/USD's succession of lower highs

Resistance: Wednesday's ceiling was 1.1250, after Tuesday's high had only narrowly exceeded it. Successive October peaks have declined from just below 1.1300 on 2 October. The last time EUR/USD traded above 1.1300 was 1 October.

Support: Since Monday's brief dip below 1.1200, that level has held. A floor formed at 1.1150 on both 12 October and 15 October. The range bottom is the 14 October low, just above 1.1100.

Bias: A closing level below 1.1250 favours a short position, with 1.1150 the first target and 1.1100 next. Since mid-October, the daily Stochastic Relative Strength Index (Stoch RSI) has advanced from close to zero to around 62 and continues to rise. That momentum could interrupt the sequence of lower highs. A daily close above 1.1300 invalidates the short position.

Daily EUR/USD price chart