Euro Stays Below 1.15 as French Sovereign Risk Drives Yield Spike

EUR/USD held firmly below the 1.15 threshold on Friday as European bond yields moved higher. This consolidation occurred despite relatively stable energy prices during the trading session.

Danske Bank analysts attributed the currency weakness to a sharp deterioration in French sovereign risk. The resulting pressure on German bonds pushed benchmark yields upward across the board.

French risk drives German yield increases

The ten-year Bund yield rose by five basis points to reach 3.52%. This movement followed a bear-flattening shift in the European rates curve driven by credit concerns.

Two-year Bund yields increased between five and six basis points to hit 3.28%. The widening spread reflects growing market anxiety over Paris fiscal management capabilities.

Inflation expectations stabilize near three percent

ECB consumer survey data showed one-year inflation expectations rising to 3.0% year-over-year. Three-year expectations also increased slightly to 2.9% annualized in August.

These figures indicate that inflation expectations have stopped their downward trend since May. Market participants may interpret this stabilization as a hawkish signal for future policy decisions.

German political pressure intensifies for Chancellor

Chancellor Friedrich Merz faces growing political pressure after his CDU party suffered election losses. The party missed the five percent threshold in Mecklenburg-Vorpommern and polled low in Berlin.

These results raise the probability of a leadership change and add to the political risk premium. Analysts from FXStreet note that a coalition breakdown remains unlikely but pressure is mounting.