Euro is the 'worst-performing major currency' as French yields hit their highest since 2002

The euro was the worst-performing major currency last week, as markets focus on French fiscal and political troubles. The French-German spread widened again to a level last seen during the 2011 sovereign debt crisis, and French 10-year yields touched their highest levels since 2002.

The damage is now showing up in the real economy: the French composite PMI fell back into contraction at 48.4, dragging the Eurozone index to a four-month low of 51.9, well below expectations. The short-covering bounce we flagged last week subsequently fizzled out.

We expect the ECB to hold rates on Thursday, and swap markets are in near total agreement. Aside from Lagarde’s remarks on the economy, the focus among market participants and journalists will doubtlessly focus on the Council's comments on the French sovereign crisis, as well any signal about the ECB’s willingness to backstop French debt.

Should Lagarde place greater emphasis on the risks stemming from France, or signal the ECB stands ready to step in to support bond markets, then traders could pare back bets on a December hike, which would no doubt weigh on the euro.