1.1200 gives way as Euro retreats, French yields climb and Oil tests five-month highs

1.1200 gives way as EUR/USD touches session lows. The pair failed to sustain its recovery beyond the 1.1250 area.
Persistent French debt concerns and surging Oil prices constrain prospects for a meaningful Euro rebound.
Weakness in the US Dollar limits the Euro’s downside.

1.1200 has given way again in EUR/USD. The pair slipped below that level at the opening of the US session, having met rejection just above 1.1250 earlier on Thursday. The Euro (EUR) is surrendering recent gains against the US Dollar (USD), with rising French bond yields and higher Oil prices limiting any substantial recovery as uncertainty in the Middle East grows.

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

At 5.10%, France’s benchmark 10-year OAT yield has reached its highest level since 2002. French debt yields have surged to fresh highs as investors question the government’s ability to shore up fragile fiscal stability. The country is also preparing for more protests next Saturday, with memories of last week’s riots still fresh.

A review of France’s credit standing by Moody’s is expected on Friday. Markets anticipate a downgrade that would place further pressure on the country’s already troubled credit position. In April, Moody’s assigned French sovereign debt an Aa3 rating with a negative outlook. Subsequent developments have done little to improve that outlook.

$108.00 exceeded: Brent Oil adds to Euro pressure

Above $108.00, Brent Oil is approaching its highest levels in five months. The rally is dimming the outlook for Eurozone economies while intensifying inflationary pressures, ultimately threatening to push the region into a stagflationary cycle.

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

For the outlook, ING analysts argue 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’s position is to “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 mark the beginning of a broader downtrend.

Euro essentials

Euro: currency and trading profile

20 European Union countries use the Euro as members of the Eurozone. Globally, only the US Dollar is traded more heavily. The Euro represented 31% of foreign exchange transactions 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 actively traded currency pair. EUR/JPY follows at 4%, ahead of EUR/GBP at 3% and EUR/AUD at 2%.

ECB policy and its effect on the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank. Interest-rate setting and monetary policy management fall within its remit. Maintaining price stability is the ECB’s core mandate, requiring it either to contain inflation or to stimulate growth. Adjustments to interest rates are its main policy instrument. Higher relative rates, or expectations of rate increases, generally support the Euro; the reverse also applies. Monetary policy is decided 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 and the Euro’s value

For the Euro, a key economic measure 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, obliges the central bank to increase interest rates to restore control over prices. When Eurozone interest rates are comparatively higher than those elsewhere, the Euro generally benefits. Such rates make the region a more attractive destination for global investors’ funds.

Economic indicators and Euro performance

The Euro can respond to data releases that reveal the economy’s condition. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys can each shape the single currency’s direction. Economic strength supports the Euro by drawing in foreign investment and potentially prompting the ECB to raise interest rates, directly strengthening the currency. Conversely, weak economic readings are likely to weigh on the Euro. Particular attention goes to Germany, France, Italy and Spain, the euro area’s four largest economies. Together, they represent 75% of the Eurozone economy, making their data especially important.

Trade Balance: implications for the Euro

The Trade Balance is another data release that matters for the Euro. Over a specified period, it captures the gap between a country’s export earnings and its import spending. Strong foreign demand for a country’s exports creates additional demand for its currency as overseas buyers seek to purchase those goods, lifting the currency’s value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.