CME glitch; U.S. dollar on pace for weekly fall; Tokyo CPI - what’s moving markets
EUR/USD edged higher while core European bond yields eased as mixed PMI data from France and Germany painted an uneven picture of business activity across the eurozone. FX and sovereign bond markets reacted cautiously, reinforcing the perception that the monetary policy outlook is shifting toward stabilization rather than immediate tightening. The opportunity lies in understanding how divergent economic signals may influence positioning in the euro and European duration assets.
Main Narrative
The latest composite PMI figures underscore a dual-track recovery in the eurozone. France surprised on the upside, with its composite PMI improving to 49.9 in November from 47.7 in October, outperforming the consensus forecast of 48.0. While it remains marginally below the expansion threshold of 50, the sharp improvement signals that French services and manufacturing may be stabilizing faster than expected, easing recession concerns.
By contrast, Germany’s composite PMI moderated to 52.1 from 53.9, missing the market expectation of 53.5. Although the index remains in expansionary territory, the loss of momentum suggests that demand in Europe’s industrial powerhouse may be cooling, reflecting external headwinds such as softer global manufacturing orders and higher financing costs.
The euro’s modest rise to $1.1546 reflects this nuanced backdrop. Markets are less preoccupied with growth direction and more focused on growth resilience. The currency’s upward bias indicates that investors see the eurozone economy as sufficiently stable to support ECB policy normalization, even if that normalization is slower than previously anticipated. At the same time, sovereign bond markets maintain a cautious stance, with the French 10-year OAT yield slipping to 3.469% and the German 10-year Bund yield easing to 2.697%. These moves suggest that bond markets are pricing a lower probability of aggressive ECB tightening, given subdued inflationary impulses from weak manufacturing data.
Investor behavior highlights a preference for selective risk exposure. Currency traders recognize that a broad downturn is not imminent, while bond investors remain focused on slower growth and gently easing inflation. The divergence between FX strength and falling yields captures this balance between resilience and caution.
Targeted Market Impact
The euro’s 0.2% appreciation signals moderate confidence in the region’s macro outlook. EUR/USD is now testing levels that could challenge rate-differential assumptions if U.S. data weakens further. Meanwhile, lower French and German yields reflect persistent demand for duration assets as investors seek safety ahead of year-end portfolio rebalancing. Both the Bund and OAT moves, down 2 and 1 basis points respectively, indicate that central bank policy expectations are broadly anchored. No signs are emerging of bond market stress, reinforcing the eurozone’s relative macro stability.
Forward View
Near term, markets will focus on eurozone inflation data and upcoming ECB communications, particularly commentary on the trajectory of real rates and balance sheet normalization. If PMIs continue to trend toward expansion, while inflation holds near target, EUR/USD could gain modest further support and bond yields could stabilize or rise slightly. However, if Germany’s slowdown deepens or price pressures soften, yields may drift lower and the euro could lose momentum.
The base case points to sustained euro stability with limited upside risk unless macro data significantly improves. The alternative scenario sees rising policy divergence between Germany and France, which could pull yields lower and weigh on the currency.
Conclusion
Investors seeking to position for moderate euro resilience and stable rate expectations could consider a balanced stance, favoring selective EUR/USD exposure while maintaining duration in core European sovereign bonds. The key risk is a sharper-than-expected downturn in German activity, which would undermine both euro strength and yield stability.