EUR/USD: French 10-year bonds at dangerous level

In a bond market environment that is increasingly tense on both sides of the Atlantic, the EUR/USD, not without nervousness, is holding its positions around $1.1650, within a narrow sideways channel (range).

In the US, while German debt currently inspires little fear, it is naturally on the French debt side that concerns are concentrated, even though the probability of the Bayrou government falling on September 8th following a vote of confidence is arithmetically very high. And with it, the questioning of an austere 2026 budget, including 44 billion euros in savings.

The 10-year OAT is heating up to 3.59%, surreptitiously exceeding 3.60% yesterday, causing the CAC 40 to fall again (-0.70% to 7,653 points). For comparison, its German counterpart is worth 2.77%, and its Greek counterpart 3.51%. So much so that Nomura economists are asking: "Is France the new Italy?" 

"The next major rating agency announcement will be Fitch's on September 12 (i.e., immediately after the 8 September confidence vote). However, Fitch had already assumed in its 14 March assessment that the pathetic Bayrou government would fail and that early elections would be held in the second half of 2025. While there are reasons to believe that a downgrade on 12 September is unnecessary, the fact that Fitch has already placed France on a negative outlook and that France has a rating similar to that of the UK (which we consider to be much less concerning both fiscally and politically) presents clear downgrade risks. Nevertheless, rating agencies are generally very slow to downgrade or even change their outlook. We should therefore expect downgrades, but the process could be gradual."

Yesterday, preliminary eurozone inflation figures for August were on the morning's statistical agenda. Regarding consumer prices, the figures show a slight acceleration in August, with inflation at 2% year-on-year compared to 1.9% the previous month.

In the US, employment, whose correlation with inflation is complex but real, will be scrutinized in the second half of the week with a battery of indicators, culminating on Friday with the NFP (Non-Farm Payrolls) report, the traditional and always closely followed federal report on the health of private employment (excluding agriculture) in the United States. Economists surveyed expect, on average, a slight increase in unemployment to 4.2% of the labor force, and 73,000 net job creations.

This "US nonfarm payrolls report will provide an idea of ​​the potential extent of the Fed's rate cut this year. Its Chairman, Jerome Powell, has indicated that the labor market now takes precedence over inflation in the central bank's decisions," adds Caesar Perez Ruiz, Chief Investment Officer and CIO at Pictet Wealth Management.

Forex traders learned of the PCE prices across the Atlantic at the end of last week, the Fed's preferred measure for assessing price dynamics. The publication of these retail prices did not bring any major surprises. Over one year, the increase in the "core" index, i.e., excluding food and energy prices, was 3%, right in line with the expectations of economists surveyed by the Wall Street Journal.

John Plassard, Partner and Head of Investment Strategy at City Gestion, sees this as "a resilience of US households despite price tensions," in a talk on BFM Business. The scenario of a 25 basis point Fed Funds rate easing is widely expected for the September FOMC.

This FOMC will be particularly closely watched since, at the Jackson Hole symposium, the head of the powerful monetary institution paved the way for a little more flexibility. In any case, the CME Group's FedWatch tool puts the probability of a 25 basis point Fed Funds rate contraction at 88.1%. The Fed's comments on tariffs will also be closely scrutinized, as a large part of them have just been ruled illegal by a federal appeals court.

The remarks made at the annual gathering of the world's finance ministers "did not change [PIMCO's] basic outlook," which calls for "a gradual series of rate cuts - likely starting with a 25 basis point cut in September - to bring the federal funds rate back to a neutral range (3.0% to 3.5%), likely before Powell's term as Fed Chair ends in May 2026."