Euro: Holds below 1.15 against US Dollar as yields rise - Danske Bank

Danske Research Team notes that EUR/USD consolidated below 1.15 on Friday as European yields moved higher, with Bund yields rising amid increased French sovereign risk. The report also highlights firmer Eurozone inflation expectations, upcoming preliminary September PMIs and growing political pressure on German Chancellor Friedrich Merz as key factors to watch for the Euro outlook.

Euro holds as yields reprice higher

"European rates also rose on Friday, in a bear-flattening move driven by a combination of rising energy prices and a dramatic deterioration in French sovereign risk. The Bund 2Y rose 5-6bp to 3.28%, the Bund 10Y rose 5bp to 3.52%. EUR/USD consolidated below 1.15 on Friday, as energy prices remained relatively little changed. "

"In the Euro area, inflation expectations in the ECB's consumer survey were slightly higher in August. The 1Y median expectation rose to 3.0% y/y, while the 3Y median expectation increased to 2.9% y/y. After trending lower since May, expectations now appear to have stabilised around 3%. The end of the declining trend is likely to be interpreted hawkishly on the margin by the ECB. "

"The key data releases this week are Wednesday's preliminary September PMIs for most major economies. The euro area will be especially interesting, as strong growth over the summer has made it easier for the ECB to tighten monetary policy, with focus on whether momentum increases further, especially in manufacturing."

"In Germany, Chancellor Merz's CDU party was beaten markedly in two regional elections on Sunday. According to preliminary results, the party fell to 4.9% in Mecklenburg-Vorpommern, missing the 5% threshold, and 18.8% in Berlin. The far-right AfD came out ahead of the social democratic SPD in Mecklenburg-Vorpommern, winning 38.2% against 35.5%, although the AfD is unlikely to enter government, as the other parties have ruled out a coalition with it. Die Linke won the Berlin state election with 25.7%. "

"Merz called the north-eastern state result a "disaster" but said he will stay on as Chancellor and press ahead with his reform agenda. The pressure on Merz nonetheless increases further, raising the likelihood of a change of Chancellor and reinforcing a slowly building political-risk-premium narrative, though a breakdown of the federal coalition still looks unlikely for the time being."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)