Euro Returned to the Bottom of the Major-Currency Ranking as Renewed Pressure on French Bonds Partly Reversed Monday’s Sovereign-Market Relief
What’s happening: Euro returned to the bottom of the major-currency ranking on Tuesday as renewed pressure on French government bonds partly reversed Monday’s relief. France’s 10-year yield rose 5.2bps to 4.955% while the German Bund yield fell 3.1bps to 3.339%, widening the OAT–Bund spread from around 153bps to 162bps. Spanish, British and US yields also declined, so the move was French-specific.
Why it matters: Moody’s decision to maintain France’s Aa3 rating removed an immediate downgrade threat without resolving the underlying fiscal and political risks, and the currency market appears to be reflecting that unresolved uncertainty. Kiwi, Aussie and Dollar led the majors higher.
Also ahead:
- Australian Q3 CPI (Wednesday): markets price about 62% odds of another RBA hike at the November 3 meeting, and the composition of inflation may matter more than the headline.
- UK Budget (Wednesday): the test is whether the government can maintain confidence in Britain’s fiscal position, with a BoE November hike about 94% priced.
- Central banks: the RBNZ, BoC and Fed decide on Wednesday, the ECB on Thursday and the BoJ on Friday, leaving guidance as the main source of surprise.
Euro returned to the bottom of the major-currency performance ranking on Tuesday as renewed pressure on French government bonds partly reversed Monday’s sovereign-market relief. At the time of writing, France’s 10-year yield rose 5.2bps to 4.955%, while the corresponding German Bund yield declined 3.1bps to 3.339%, widening the OAT–Bund spread from around 153bps to 162bps. The divergence was notably French-specific, with Spanish, British and US government bond yields also declining. Meanwhile, Kiwi, Aussie and Dollar led the major currencies higher, leaving Euro underperforming across the board.
Currency Heat Map.
The renewed spread widening reinforces concerns that Moody’s decision to maintain France’s Aa3 rating has removed an immediate downgrade threat without resolving the underlying fiscal and political risks. Attention now shifts to Wednesday’s Australian Q3 CPI and UK Budget, two events capable of reshaping interest-rate expectations and currency performance along with the week’s major central-bank decisions. Australian inflation could influence expectations for another RBA hike, while Britain’s fiscal announcement will test whether confidence in government borrowing plans can continue supporting Sterling.
French Sovereign Pressure Returns as Moody’s Relief Fades
Monday’s recovery in French government bonds proved short-lived. The OAT-Bund spread, which had widened to approximately 175bps last Thursday, narrowed to 166bps on Friday and 153bps on Monday before rebounding toward 162bps on Tuesday. More than half of Monday’s narrowing has therefore been reversed.
The movement stands out against declining yields elsewhere. Spain’s 10-year yield fell 0.8bps to 4.000%, Britain’s declined 2.3bps to 5.328%, and the US 10-year yield slipped 1.4bps to 4.974%. The divergence points to renewed pressure concentrated in French sovereign debt rather than a broader rise in European or global borrowing costs.
No single immediate catalyst has been established for Tuesday’s move. However, France’s unresolved budget negotiations continue to provide a source of uncertainty. Parliamentary proceedings over the government’s 2027 fiscal plans are under way, with disagreements over spending reductions and revenue measures complicating efforts to establish a credible deficit-reduction path.
Moody’s decision to maintain France’s Aa3 rating with a negative outlook removed one immediate source of concern, but did little to resolve the longer-term fiscal challenge. French sovereign spreads also remain wider than their approximately 135bp level earlier in October.
The currency market appears to be reflecting that unresolved uncertainty. Euro’s broad underperformance is consistent with a continuing sovereign-risk discount, although relative policy expectations and other currency-specific factors also contribute. The key distinction is that French fiscal risk continues to weigh on Euro even without a newly identified political shock.
Australian CPI: Underlying Services Inflation Could Reset RBA Expectations
Wednesday’s Australian Q3 CPI release arrives at a crucial point for RBA expectations, with markets already pricing approximately 62% probability of another rate increase at the November 3 meeting.
The RBA has raised its cash rate four times this year to 4.60%, but recent official comments suggest that the inflation challenge remains unresolved. Deputy Governor Andrew Hauser has described the inflation outlook as materially worse than previously projected, while Assistant Governor Sarah Hunter warned that higher energy costs are spreading beyond petrol into construction materials and broader supply chains. Hunter also emphasized that domestic demand continues to exceed sustainable supply.
Economists expect quarterly trimmed-mean inflation of approximately 0.9–1.0%, compared with the RBA’s August forecast of 0.8%. However, the composition of inflation may matter more than a modest surprise in the headline figure. Higher fuel costs are expected to contribute significantly to headline inflation, reflecting the Middle East energy shock. Such increases can be distinguished from persistent domestic price pressures when assessing monetary policy.
Services inflation will therefore be particularly important. CBA expects market-services inflation to strengthen, while Westpac’s narrower services measure suggests some easing. Although the measures are not directly comparable, they highlight uncertainty over whether domestic price pressures are becoming more widespread.
A trimmed-mean reading above 1.0%, particularly if accompanied by broader services inflation, could reinforce expectations for another RBA hike and support Aussie. Conversely, softer underlying inflation and easing services pressure would challenge the current market pricing.
The release also arrives shortly before the RBNZ decision, making AUD/NZD particularly sensitive to the sequence of the two announcements. An initial reaction to Australian inflation could be reinforced or reversed by subsequent New Zealand policy guidance.
UK Budget: Fiscal Credibility Faces a Gilt-Market Test
Wednesday’s UK Budget presents a different challenge for Sterling, with investors focused on whether Chancellor Rachel Healey can maintain confidence in Britain’s fiscal position while addressing economic and cost-of-living pressures.
The anticipated package is relatively cautious, prioritizing bond-market stability over major spending commitments. Measures to ease household energy costs and support business investment are expected, while limited fiscal headroom constrains the government’s options. The challenge is substantial: available room against the fiscal rules has reportedly narrowed considerably, while public debt and elevated borrowing costs leave little tolerance for a material deterioration in the fiscal outlook.
The key transmission channel runs through gilt yields and investor confidence rather than the Budget’s spending measures alone. A credible package that contains borrowing concerns could support Sterling by limiting sovereign-risk premiums and preserving expectations for further BoE tightening. However, a looser-than-expected fiscal stance could push gilt yields higher without necessarily strengthening Sterling. If investors interpret rising yields as compensation for greater fiscal risk, the resulting pressure on confidence could offset any support from higher interest-rate expectations.
Wednesday’s Two Tests: Supportive vs Adverse Outcomes
| Event | Supportive outcome | Adverse outcome |
|---|---|---|
| Australian Q3 CPI | Trimmed mean above 1.0%, especially with broader services inflation, reinforcing expectations for another RBA hike and supporting Aussie | Softer underlying inflation and easing services pressure, challenging the current market pricing |
| UK Budget | A credible package that contains borrowing concerns, supporting Sterling and expectations for further BoE tightening | A looser-than-expected fiscal stance that pushes gilt yields higher without necessarily strengthening Sterling |
Markets currently assign approximately 94% probability to a BoE hike at the November 5 meeting. The Budget could influence that outlook through its implications for inflation, demand and government borrowing. With EUR/GBP already under pressure, the contrast between renewed French sovereign stress and the UK’s approaching fiscal test could become an important driver of the cross.
Central Banks: Policy Paths Remain the Broader Risk
Wednesday also brings monetary-policy announcements from the RBNZ, BoC and Fed, followed by the ECB on Thursday and BoJ on Friday. The immediate decisions are largely anticipated, leaving guidance and subsequent policy expectations as the principal sources of surprise.
Central-Bank Pricing
- RBNZ: hike to 3.00% priced at approximately 98%
- BoC: hike priced at approximately 80%
- Fed: hold at 3.75–4.00% priced at 90.6% in Tuesday’s snapshot
- ECB (Thursday): widely expected to hold its deposit rate at 2.50%
- BoJ (Friday): decision due at the end of the week
The RBNZ is expected to raise its Official Cash Rate to 3.00%. The key question is whether policymakers reinforce expectations for further tightening or suggest that a pause could follow. The BoC faces greater uncertainty, and updated economic projections will be important in determining whether the central bank’s outlook supports the additional tightening anticipated by markets.
The Fed is expected to maintain its target range at 3.75–4.00%. Attention will remain on December tightening expectations, particularly ahead of Thursday’s US GDP and PCE releases. For Euro, Thursday’s ECB meeting adds another dimension to French sovereign concerns, as President Christine Lagarde’s assessment of inflation, financial conditions and sovereign-market developments could influence expectations for subsequent tightening.
The immediate focus remains on Euro’s renewed weakness and whether French bond spreads continue widening. Wednesday’s Australian inflation and UK Budget could then introduce fresh currency-specific catalysts before central-bank decisions and US economic data reshape the broader monetary-policy outlook. With French sovereign risks still unresolved and major economic announcements approaching, currency markets face another series of potential adjustments in relative interest-rate expectations, fiscal confidence and risk sentiment.
Related Coverage
Euro and Central Banks
- France Avoids Downgrade, but EUR/GBP and EUR/CHF Face Fresh Downside Tests: France escaped an immediate Moody’s downgrade and its 10-year yield fell 11.6bps on Monday, yet Euro gained little relief, suggesting unresolved fiscal and political risks continue to weigh on the currency. The French-German spread narrowed to around 153bps but remained elevated, with EUR/GBP facing a potential break below 0.8360 and EUR/CHF testing the 0.9193 region, and the ECB decision and UK Budget could provide further catalysts.
- NZIER Shadow Board Backs RBNZ Hike to 3.00%, but Divides Over Further Tightening: the NZIER Monetary Policy Shadow Board recommends raising the OCR from 2.75% to 3.00% on Wednesday, citing higher oil prices, NZD weakness and renewed inflation risks. Members disagree over how much further tightening is needed: some favour continued increases to contain inflation expectations, while Kiwibank’s Jarrod Kerr supports a hike followed by a prolonged pause and Westpac’s Kelly Eckhold urges patience amid weak labour-market conditions. With the hike heavily priced, the RBNZ’s guidance could matter more than the decision itself.
US and Japan Data
- US Durable Goods Orders Rise 1.8%, but Aircraft Drive Much of the Strength: September orders jumped 1.8%, exceeding expectations of 1.6%, but aircraft orders surged 28.4% and transportation accounted for $5.2B of the $6.3B increase. Excluding transportation, orders rose a more modest 0.5%, slightly below forecasts, while core capital goods orders rose 0.5% and shipments accelerated to 1.2%, so the release points to resilient manufacturing demand but the headline overstates the breadth of the improvement.
- Japan Services Producer Inflation Rises to 3.7%, but Underlying Price Pressures Hold Steady: the Services PPI accelerated from 3.5% to 3.7% y/y in September, matching expectations, but the rise was driven largely by transportation costs, with ocean freight inflation surging to 97.7%. Excluding international transportation, service-price inflation held steady at 2.9% and labour-intensive services inflation eased from 2.7% to 2.6%, offering a more qualified inflation signal ahead of Friday’s BoJ decision than the headline alone.
FAQ
Why is Euro the weakest major currency again?
Renewed pressure on French government bonds partly reversed Monday’s relief. France’s 10-year yield rose 5.2bps to 4.955% while the Bund yield fell 3.1bps, widening the OAT–Bund spread from around 153bps to 162bps, and Spanish, British and US yields also declined. Moody’s decision to maintain France’s Aa3 rating removed an immediate downgrade threat but not the underlying fiscal and political risks.
What could Australian CPI mean for the RBA?
Markets price about 62% odds of another hike at the November 3 meeting. Economists expect quarterly trimmed-mean inflation of roughly 0.9–1.0% against the RBA’s August forecast of 0.8%, and a reading above 1.0% with broader services inflation could reinforce hike expectations and support Aussie. Softer underlying inflation would challenge current pricing, and AUD/NZD is sensitive to the sequence with the RBNZ decision.
Why does the UK Budget matter for Sterling?
The key channel is gilt yields and investor confidence. A credible package that contains borrowing concerns could support Sterling and preserve expectations for further BoE tightening, with about 94% probability of a November 5 hike priced. A looser-than-expected fiscal stance could push gilt yields higher without strengthening Sterling, since investors could read rising yields as compensation for fiscal risk.
Key Takeaways
- Euro returned to the bottom of the major-currency ranking on Tuesday as French bond pressure partly reversed Monday’s relief.
- The OAT–Bund spread rebounded from around 153bps to 162bps, reversing more than half of Monday’s narrowing from about 175bps last Thursday.
- French yields rose 5.2bps to 4.955% while German, Spanish, British and US yields fell, so the pressure is concentrated in French debt.
- Moody’s kept France at Aa3 with a negative outlook, removing an immediate downgrade threat without resolving the fiscal challenge.
- Australian Q3 CPI on Wednesday matters for RBA expectations, with about 62% odds of a November 3 hike priced and economists expecting trimmed-mean inflation of 0.9–1.0% against the RBA’s 0.8% forecast.
- The UK Budget tests gilt-market confidence, with limited fiscal headroom and about 94% odds of a November 5 BoE hike priced.
- The RBNZ (about 98% for a hike), BoC (about 80%) and Fed (90.6% hold) decide on Wednesday, then the ECB on Thursday and BoJ on Friday, with guidance the main source of surprise.
What to Watch Next
Wednesday’s sequence starts with Australian Q3 CPI, which can move AUD/NZD before the RBNZ decision, then the UK Budget and the RBNZ, BoC and Fed announcements. The main French gauge remains whether the OAT–Bund spread keeps widening from 162bps.
Thursday’s US GDP and PCE releases and the ECB meeting follow, with Lagarde’s remarks on sovereign-market developments the next test for Euro, ahead of the BoJ decision on Friday.