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

• EUR/USD holds below 1.1250 as France's 10-year yield exceeds 5%.
• October's four rallies have produced successively lower peaks.
• France faces a Moody's credit rating review on Friday.

A rise above 5% in France's 10-year government bond yield on Wednesday, its first since 2002, drew little response from the euro. 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 single currency, with no offsetting shift in the interest rate differential against the US: both the Fed and the European Central Bank (ECB) are expected to leave rates unchanged in October before raising them in December.

France's 10-year borrowing premium over Germany reaches 1.6 points

At roughly 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 threshold, while Germany's stood near 3.4%. Five-year insurance against a French debt default is now at its most expensive since 2013. With government debt approaching 120% of the economy, parliamentary debate on the 2027 budget will resume on 27 October, following delays caused by more than 2K amendments.

The burden of a widening French spread extends to the euro as a whole, increasing the risk that the ECB must weigh its inflation target against the bond market of an individual member. Created in 2022 to address that dilemma, the ECB's Transmission Protection Instrument (TPI) remains unused. On 14 October, ECB President Lagarde said France needed to find the solution domestically through its own fiscal policy.

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

EUR/USD's interest rate differential looks set to hold until December

Following increases in June and September, the ECB deposit rate stands at 2.50%, with traders assigning about a 95% probability to no change on 29 October. September inflation in the euro area came in at 3.8%; energy prices were 18.9% higher than a year earlier. Excluding energy, food, alcohol and tobacco, inflation was 2.5%. Higher interest rates offer little relief from energy costs determined by the US-Iran war.

With energy inflation still elevated, ECB Chief Economist Lane struck a cautious note on further policy changes on Wednesday. Bundesbank President Nagel had said on 16 October that he could not exclude another increase. The Fed's rate range stands at 3.75%-4.00%, while prediction markets assign close to an 86% probability to a hold on 28 October. Expectations that both central banks will pause in October and act in December leave little scope for the US-euro area rate differential to change before then. Chief Economist Lane also argued that broader use of the euro beyond Europe could assist the ECB in controlling prices, even as the currency's greatest risk that day originated within the bloc.

Friday's PMIs precede Moody's verdict and the weekend

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

S&P Global will release its US PMIs at 13:45 GMT on Friday. Forecasts of 55.6 for manufacturing and 57.9 for services exceed all the readings expected from the euro area. Having retreated from October's 18-month peak near 103.00, the Dollar Index sits just below 102.00, yet the softer dollar has provided scant support for EUR/USD. Friday also brings Moody's review of France. Under EU rules, agencies release sovereign rating decisions after European markets close, leaving EUR/USD to trade the PMI figures before the rating verdict and reopen on Monday with it known.

EUR/USD faces key levels as rally peaks decline

Resistance: Wednesday's advance was capped at 1.1250, a level Tuesday's high had only marginally exceeded. Successive October peaks have declined from just below 1.1300 on 2 October, and EUR/USD last traded above 1.1300 on 1 October.

Support: Following Monday's brief dip below 1.1200, that level has held. The lows on 12 October and 15 October established a floor at 1.1150, while the range bottom is marked by the 14 October low just above 1.1100.

Bias: Favour short positions while closes remain below 1.1250, with 1.1150 the initial target, followed by 1.1100. Since mid-October, the daily Stochastic Relative Strength Index (Stoch RSI) has risen from close to zero to around 62 and continues to advance. That momentum could interrupt the sequence of lower highs. A daily close above 1.1300 invalidates the short position.

Daily EUR/USD chart