French bond yields retreat from 'above 5%', Fed rate expectations could offer 'upside support'

Fears over the fragile state of French politics have eased, but far from evaporated, in the past few days. The 10-year OAT yield fell to 4.8% today, from above 5% a week ago, after presidential frontrunner Le Pen offered reassurances this week on reining in government spending, which markets appear to have welcomed.

Yet the protests and marches across the country in recent days in support of higher education funding show how hard it will be to strike a balance between shoring up the public finances against keeping the voter base on side. We will have a couple of speeches from ECB officials to look forward today, namely from Cipollone and outgoing member Schnabel.

The general tone of recent communications from Governing Council members has indicated that while further tightening is on the cards, the October meeting later this month is likely to see the bank pause and take stock.

We still see more room for the Fed to disappoint market expectations for hike going into 2027 than the ECB, so this could provide some upside support for the euro in the near-term.