Why is the euro outpacing major currency peers as French bond yields ease further?

• The Euro rallies towards 176.10 against the Japanese Yen as easing French bond yields offer relief.
• French bonds found greater favour after Moody’s retained their Aa3 rating with a negative outlook.
• Interest rates are expected to remain on hold at both the ECB and the BoJ this week.

Leading gains among its major currency peers as the week begins, the Euro (EUR) trades 0.25% higher against the Japanese Yen (JPY), near 176.10, in the European session. A further decline in French bond yields is offering relief to the single currency, which had lagged its peers over the past few weeks.

Despite recouping most of their opening decline, 10-year French bond yields are trading 0.5% lower, near 4.99%, at the time of writing. They have retreated 3% from last week's peak of 5.14%, their highest level in over two decades.

Why are the Euro and French bonds gaining after Moody’s retains France’s rating?

France, according to analysts at Deutsche Bank, “got a boost on Friday night as Moody’s defied market expectations and maintained their Aa3 rating (negative outlook) on the sovereign.” Although they point out that “the expected one-notch cut would only have taken it in line with S&P’s A+, so shouldn’t have been too destabilising,” retaining the rating nevertheless offered a measure of relief. Describing the immediate market response, Deutsche Bank observed that “the Euro spiked a couple of tenths very late on Friday immediately after the news and is +0.13% higher this morning, with French bond futures rising nearly three-quarters of a point.”

Monetary policy decisions from the European Central Bank (ECB) on Thursday and the Bank of Japan (BoJ) on Friday will provide key cues for the Euro and the Japanese Yen this week.

Will rates stay on hold before hikes resume later?

Upcoming policy meetings will dominate market attention through the rest of the week, according to analysts at Danske Bank, as “focus turns to interest rate decisions from the ECB on Thursday and the Bank of Japan on Friday.” Danske Bank says it “expects both to keep interest rates unchanged before resuming rate hikes later this year,” pointing to a short-term pause in tightening while the broader outlook continues to signal further increases.

Also on investors' radar later this week are October's preliminary German Harmonised Index of Consumer Prices (HICP) figures and Japan’s Tokyo Consumer Price Index (CPI) data.