Euro slips below 1.1200 amid rising French yields; Oil approaches five-month highs

EUR/USD slips to session lows under 1.1200 as its recovery stalls around 1.1250.
A meaningful Euro rebound faces strong headwinds from rising Oil prices and persistent concerns over French debt.
Weakness in the US Dollar continues to limit the Euro’s downside.

The Euro (EUR) is surrendering some of its recent gains against the US Dollar (USD) on Thursday, with a substantial recovery constrained by climbing French bond yields and higher Oil prices as uncertainty in the Middle East intensifies. Having met resistance just above 1.1250 earlier in the day, EUR/USD has slipped back below 1.1200 at the start of the US session.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Investor unease over the government’s inability to shore up its fragile fiscal position has driven French debt yields to fresh highs. With memories of last week’s riots still vivid, the country is preparing for more protests next Saturday. Against this backdrop, the benchmark 10-year OAT yield has surged to 5.10%, a level last seen in 2002.

Markets are bracing for a downgrade when Moody’s reviews France’s credit standing on Friday, an outcome that would put further pressure on the country’s already troubled credit position. In April, Moody’s assigned France’s sovereign debt an Aa3 rating with a negative outlook; subsequent developments have done little to improve that outlook.

How is the Brent Oil rally weighing on the Euro?

Adding to the strain, Brent Oil has climbed above $108.00 and is approaching its highest levels in five months. The rally is dimming the outlook for Eurozone economies while intensifying inflationary pressures, raising the risk of the region slipping into a stagflationary cycle.

Further Euro losses are being limited, however, by the US Dollar’s own weak performance this week. US Treasury yields are easing from their recent peaks as investors expect the Federal Reserve to pause next week and assess the overall extent of the monetary tightening cycle.

On the outlook, ING analysts maintain that “until the rock-solid short-end of the US yield curve starts to buckle, it is hard to make the case that the Dollar needs to fall across the board.” The bank therefore says it would “favour[s] consolidation over correction for the DXY Dollar index, but do[es] not rule out some further softening to the 101.25/30 area,” implying that any Dollar decline is likely to remain limited rather than mark the beginning of a wider downtrend.

Euro: frequently asked questions

Which countries use the Euro, and how widely is it traded?

Second only to the US Dollar in global trading activity, the Euro is used by the 20 European Union countries that make up the Eurozone. During 2022, it featured in 31% of all foreign exchange transactions, with average daily turnover exceeding $2.2 trillion. The world’s most actively traded currency pair, EUR/USD, represents an estimated 30% of all transactions. Next are EUR/JPY at 4%, EUR/GBP at 3% and EUR/AUD at 2%.

Why does the ECB matter for the Euro?

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank, determining interest rates and overseeing monetary policy. Maintaining price stability is its central mandate, whether through containing inflation or supporting growth. Interest rate increases and cuts are its main policy instruments. Higher relative rates, or expectations that rates will rise, generally support the Euro; the reverse also holds. Monetary policy is decided at eight meetings each year by the ECB Governing Council. Those decisions are taken by the heads of the Eurozone’s national banks alongside six permanent members, including ECB President Christine Lagarde.

Why can inflation figures move the Euro?

A key economic gauge for the Euro is Eurozone inflation, tracked through the Harmonised Index of Consumer Prices (HICP). An inflation reading above expectations, particularly one exceeding the ECB’s 2% target, requires the central bank to raise interest rates to bring price pressures under control. When interest rates are relatively higher than those of its counterparts, the Euro usually benefits because the region becomes a more attractive destination for global investors’ funds.

Which economic indicators can move the Euro?

The Euro can respond to economic releases because they reveal the economy’s underlying health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can all shape the single currency’s direction. Economic strength supports the Euro by drawing in more foreign investment and potentially prompting the ECB to raise interest rates, which directly strengthens the currency. Weak data, by contrast, is likely to weigh on the Euro. Particular weight is attached to releases from Germany, France, Italy and Spain. As the euro area’s four largest economies, they together represent 75% of the Eurozone economy.

Why does the Trade Balance matter for the Euro?

The Trade Balance is another important release for the Euro, showing the difference between a country’s export earnings and its spending on imports during a specified period. Strong overseas demand for a country’s exports creates additional demand for its currency as foreign buyers seek to pay for those goods, lifting its value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.