Euro leads major currency peers as French bond yields ease further

• Lower French bond yields lend support as the Euro climbs towards 176.10 against the Japanese Yen.
• Moody’s decision to retain the Aa3 rating with a negative outlook bolstered the appeal of French bonds.
• Interest rates are expected to remain on hold at both the ECB and the BoJ this week.

A further decline in French bond yields is supporting the Euro (EUR) at the start of the week, following several weeks of underperformance. The single currency is outpacing its major peers and, during the European session, trades 0.25% higher against the Japanese Yen (JPY) at around 176.10.

Despite retracing most of their opening decline, French 10-year bond yields remain 0.5% lower at around 4.99% at the time of writing. They have fallen 3% from last week’s peak of 5.14%, their highest level in more than two decades.

Euro and French bonds advance after Moody’s retains France’s rating

France’s rating reprieve offered modest support to markets, according to Deutsche Bank analysts, who say the country “got a boost on Friday night as Moody’s defied market expectations and maintained their Aa3 rating (negative outlook) on the sovereign.” Although “the expected one-notch cut would only have taken it in line with S&P’s A+, so shouldn’t have been too destabilising,” they note that leaving the rating unchanged nevertheless brought some relief at the margin. Describing the initial market response, Deutsche Bank observed that “the Euro spiked a couple of tenths very late on Friday immediately after the news and is +0.13% higher this morning, with French bond futures rising nearly three-quarters of a point.”

Monetary policy decisions will be key drivers for the Euro and the Japanese Yen this week, with the European Central Bank (ECB) announcing its decision on Thursday, followed by the Bank of Japan (BoJ) on Friday.

Markets await rate holds ahead of further increases

Upcoming central bank meetings are set to dominate market attention through the rest of the week, according to Danske Bank analysts, as “focus turns to interest rate decisions from the ECB on Thursday and the Bank of Japan on Friday.” Saying it “expects both to keep interest rates unchanged before resuming rate hikes later this year,” the bank points to a pause in tightening in the near term, while further increases remain the broader policy direction.

Also on investors’ agenda later this week are October’s preliminary German Harmonised Index of Consumer Prices (HICP) figures and Japan’s Tokyo Consumer Price Index (CPI) data for the same month.