How will the Euro respond to PMIs first and France’s credit rating over the weekend?

• Why is EUR/USD stalled below 1.1250 as France's 10-year yield crosses 5%?
• October's four rallies have produced successively lower peaks.
• Friday brings Moody's assessment of France's credit rating.

EUR/USD remains just below 1.1250, with the Euro barely reacting as France's 10-year government bond yield crossed 5% on Wednesday for the first time since 2002. All four advances since 2 October have peaked below the preceding rally. France's yield spread is weighing on the currency, while 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.

Why is France paying 1.6 points more than 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 easing below that mark, while Germany's stood near 3.4%. Meanwhile, five-year insurance against French debt default is at its most expensive since 2013. Government debt amounts to nearly 120% of the economy. After more than 2K amendments delayed proceedings, parliament will resume debating the 2027 budget on 27 October.

Pressure from a widening French spread extends to the Euro as a whole: it increases the possibility of the ECB having to prioritise either its inflation target or a member state'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 France needed to find the solution domestically through its own fiscal policy.

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

Can the EUR/USD rate differential shift before December?

Traders assign roughly a 95% probability to an ECB pause on 29 October, following increases in June and September that took the deposit rate to 2.50%. September inflation in the euro area stood at 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 do little to address energy costs driven by the US-Iran war.

With energy inflation remaining elevated, ECB Chief Economist Lane urged caution over further policy moves on Wednesday. Bundesbank President Nagel, however, said on 16 October that another increase could not be ruled out. Across the Atlantic, the Fed's rate range stands at 3.75%-4.00%, with prediction markets assigning close to an 86% probability to unchanged rates on 28 October. Expectations of October pauses and December moves at both central banks leave little scope for the US-euro area rate differential to change before then. Chief Economist Lane also suggested that broader use of the Euro beyond Europe could aid the ECB's efforts to control prices, even as the currency's greatest risk that day originated within the region.

What do Friday's PMIs and Moody's review mean ahead of the weekend?

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

S&P Global's US PMIs are due next at 13:45 GMT on Friday. Forecasts of 55.6 for manufacturing and 57.9 for services exceed all the expected euro area readings. Despite the Dollar Index easing to just below 102.00 from October's 18-month peak near 103.00, EUR/USD has drawn little support from Dollar weakness. Moody's assessment of France also falls on Friday. Under EU rules, agencies must release sovereign rating decisions after European markets close, meaning EUR/USD will trade the PMI figures before the rating is available and reopen on Monday with the decision known.

Which Euro levels matter as successive highs decline?

Resistance: Wednesday's advance was capped at 1.1250, after Tuesday's peak had only marginally exceeded that level. Successive October highs have fallen from just below 1.1300 on 2 October, and the last time EUR/USD traded above 1.1300 was 1 October.

Support: Following Monday's brief dip below 1.1200, that level has held. The pair found a floor at 1.1150 on both 12 October and 15 October. The range's lower boundary is the 14 October low, just above 1.1100.

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

Daily EUR/USD chart