The euro advanced, gaining against the dollar and other major currencies as manufacturing PMIs from Spain, Italy and France signalled improving conditions across the euro area. The euro area manufacturing PMI rose to 50.7, moving above the neutral 50 threshold, while Germany's gauge improved from July to 49.8, still marginally in contraction. French government bonds sold off, lifting the 10-year yield to 3.53% amid a looming September 8 confidence vote that could topple Prime Minister François Bayrou's minority government. ECB officials cautioned that inflation risks are tilted to the downside and that further rate cuts cannot be ruled out. Investors await eurozone inflation prints and the ECB meeting next week.
The euro advanced on Monday, gaining against the dollar and other major currencies as upbeat manufacturing PMI readings from Spain, Italy, and France signalled improving conditions across the bloc. The euro area's manufacturing PMI climbed to 50.7, moving above the neutral 50 threshold, while Germany's gauge also improved from July, albeit remaining marginally in contraction at 49.8. The broad-based recovery offered a constructive backdrop for the single currency.
Political risks, however, limited enthusiasm. French government bonds sold off, pushing the 10-year yield up to 3.53%. Markets braced for a September 8 confidence vote that could bring down Prime Minister François Bayrou's minority government. ECB President Christine Lagarde noted that France does not face circumstances requiring IMF intervention but emphasised the need for fiscal discipline and close monitoring of spreads.
On monetary policy, ECB Governing Council member Olli Rehn struck a cautious tone, warning that risks to inflation are tilted to the downside and that further rate cuts cannot be ruled out. While markets have scaled back expectations of another move this year, his remarks could weigh on the Euro. Looking ahead, investors will focus on upcoming eurozone inflation prints and the ECB's policy meeting in Frankfurt next week. Softer data could reinforce expectations of a dovish stance, while stronger readings may support the single currency.
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