Euro falls below 1.1200 as French yields rise and oil approaches five-month highs

Below 1.1200, EUR/USD trades at session lows as its recovery stalls around 1.1250.
Persistent concerns over French debt and surging oil prices weigh heavily on the prospects for a meaningful euro recovery.
Continued weakness in the US dollar limits further losses for the euro.

Back below 1.1200 at the opening of the US session, EUR/USD has retreated after meeting resistance just above 1.1250 earlier on Thursday. The euro (EUR) is surrendering some of its recent gains against the US dollar (USD), with rising French bond yields and higher oil prices amid mounting uncertainty in the Middle East hampering any substantial recovery.

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At 5.10%, the yield on France’s benchmark 10-year OAT has reached its highest level since 2002. French debt yields have climbed to fresh highs as investors question the government’s ability to stabilise the country’s fragile fiscal position. Further protests are expected next Saturday, while memories of last week’s riots remain fresh.

With Moody’s due to review France’s credit standing on Friday, markets expect a downgrade that would place further pressure on the country’s already troubled credit position. The rating agency assigned France’s sovereign debt an Aa3 rating in April with a negative outlook. Recent developments have done nothing to improve that outlook.

Brent Oil Rally Adds to Euro Pressure

Having climbed above $108.00, Brent oil prices are approaching their highest levels in five months. The advance darkens the outlook for eurozone economies and intensifies inflationary pressures, ultimately threatening to push the region into a stagflationary cycle.

Further euro losses are nevertheless being limited by the US dollar, which has also struggled this week. US Treasury yields have eased from recent highs as investors assess the full extent of the monetary tightening cycle and assume that the Federal Reserve will pause next week.

For 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.” Against that backdrop, the bank 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 weakness is likely to remain limited rather than signal the beginning of a wider downtrend.

Euro FAQs Explained

The Euro’s Role in Currency Markets

Used by the 20 European Union countries within the eurozone, the euro ranks second only to the US dollar among the world’s most actively traded currencies. Its share of all foreign exchange transactions was 31% in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world’s most traded currency pair. Next come EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

ECB Policy Influences the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the eurozone’s central bank, setting interest rates and conducting monetary policy. Maintaining price stability is the ECB’s principal mandate, whether through containing inflation or encouraging growth. Interest rate increases and cuts are its main policy instruments. Higher rates, or expectations of an increase, generally support the euro; the reverse also applies. Monetary policy is determined at eight meetings each year by the ECB Governing Council. The decision-makers comprise the heads of eurozone national central banks and six permanent members, among them ECB President Christine Lagarde.

Inflation Figures Shape the Euro’s Value

Measured using the Harmonised Index of Consumer Prices (HICP), eurozone inflation is a key economic indicator for the euro. An inflation reading above expectations, particularly one exceeding the ECB’s 2% target, requires the central bank to increase interest rates to regain control of price pressures. When the region’s interest rates are relatively high compared with those elsewhere, the euro usually benefits because global investors find it a more appealing destination for their funds.

Economic Releases Drive Euro Moves

By revealing the economy’s condition, data releases can move the euro. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys are among the indicators that can determine the single currency’s direction. Economic strength supports the euro by attracting foreign investment and potentially prompting the ECB to raise interest rates, directly strengthening the currency. Weak figures, by contrast, are likely to weigh on it. Particular importance attaches to releases from Germany, France, Italy and Spain, the euro area’s four largest economies. Together, they represent 75% of the eurozone economy.

The Trade Balance Affects Euro Demand

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

Euro falls below 1.1200 as French yields rise and oil approaches five-month highs

Brent Oil Rally Adds to Euro Pressure