The Euro gets the PMIs first and France's credit rating over the weekend

• EUR/USD flatlines under 1.1250 as France's 10-year yield tops 5%.
• Four October rallies, each stopping below the one before.
• Moody's reviews France's credit rating on Friday.

France's 10-year government bond yield went above 5% on Wednesday for the first time since 2002, and the Euro hardly moved on it. EUR/USD trades just under 1.1250, and each of its four rallies since October 2 has stopped lower than the one before. The French spread is a weight on the currency, and the rate gap with the US isn't moving to offset it: the Fed and the European Central Bank (ECB) are both expected to hold in October and raise rates in December.

France now pays 1.6 points more than Germany to borrow for a decade

The French 10-year yield touched just over 5% before slipping back under it, and the gap over Germany's 10-year, near 3.4%, widened to about 1.6 points, the widest since 2012. The cost of insuring French debt for five years is at its highest since 2013. Government debt is close to 120% of the economy, and parliament's debate on the 2027 budget resumes on October 27 after more than 2K amendments held it up.

A wider French spread is a cost the whole Euro carries, because it raises the chance that the ECB has to choose between its inflation target and one member's bond market. The ECB's Transmission Protection Instrument (TPI), built in 2022 for that choice, has never been used, and ECB President Lagarde said on October 14 that France's fix lies at home, in its own fiscal policy.

Part of the spread is politics. Student protests have brought partial curfews in Paris, Bordeaux and Nice, and troops are due to support police for marches planned on Saturday, the day after Moody's reviews France's rating.

The rate gap that sets EUR/USD is booked solid until December

The ECB's deposit rate is 2.50% after hikes in June and September, and traders price about a 95% chance it holds on October 29. Euro area inflation was 3.8% in September, with energy up 18.9% from a year earlier, while inflation excluding energy, food, alcohol and tobacco was 2.5%. A rate hike does little about an energy bill set by the US-Iran war.

ECB Chief Economist Lane signalled caution on further moves on Wednesday while energy inflation stays high, and Bundesbank President Nagel, on October 16, said he can't rule out another hike. The Fed's range is 3.75%-4.00%, and prediction markets put an October 28 hold near 86%. With both banks expected to sit out October and move in December, the gap between US and euro area rates has nowhere to go before then. Chief Economist Lane also said wider use of the Euro outside Europe could help the ECB control prices, on a day when the biggest risk to the currency came from inside it.

Friday has the PMIs before Moody's and the weekend after

Bank of Italy Governor Panetta speaks at 12:15 GMT on Thursday, and the euro area's preliminary consumer confidence reading at 14:00 GMT is forecast at -17 after -16.5. Hamburg Commercial Bank (HCOB) Purchasing Managers Index (PMI) figures come at 08:00 GMT on Friday, forecast at 52.8 for manufacturing after 52.9 and at 52.8 for services after 53.0. ECB Executive Board member Cipollone speaks at 14:00 GMT.

S&P Global's US PMIs follow at 13:45 GMT on Friday, forecast at 55.6 for factories and 57.9 for services, above anything the euro area is expected to report. The Dollar Index is just under 102.00, down from the 18-month high near 103.00 it reached in October, and EUR/USD has barely gained from the softer Dollar. Moody's reviews France on the same day as the PMIs, and EU rules have agencies publish sovereign decisions after European markets shut, so EUR/USD trades the PMIs without the rating and opens on Monday with it.

The Euro's levels under a run of lower highs

Resistance: 1.1250 capped Wednesday after Tuesday's high only just cleared it, and the October highs have stepped down from just under 1.1300 on October 2. EUR/USD hasn't traded above 1.1300 since October 1.

Support: 1.1200 has held since Monday's dip to just under it. 1.1150 was the floor on October 12 and October 15, and the October 14 low just above 1.1100 is the bottom of the range.

Bias: Lean short below 1.1250 on a closing basis, targeting 1.1150 and then 1.1100. The daily Stochastic Relative Strength Index (Stoch RSI) has climbed from near zero to about 62 since mid-October and is still rising, which is what could break the run of lower highs. A daily close above 1.1300 ends the short.

EUR/USD daily chart