Euro rebounds from 17-month low as French deficit steps ease bond stress

The euro bounced off its 17-month low as France took steps to reduce its deficit and the dollar pulled back. The ECB reference rate for EUR/USD on 6 October was 1.1269, up 0.58% from 1.1204 the day before, after a slide that had run for most of the past week.

What moved and why

According to the investingLive European news wrap, EUR/USD rebounded as the French government took steps to reduce the deficit, narrowing the spread between French OATs and German Bunds. The same wrap says risk sentiment improved as oil fell and bonds rose.

FXStreet reports that the pair traded around 1.1255 on Tuesday afternoon, up 0.29% on the day, helped by a modest pullback in the dollar. It adds that concerns over France's fiscal position kept the euro's gains in check. TD Securities, cited by FXStreet, argues that recent EUR/USD weakness was driven by high oil and diesel prices and French OAT concerns.

The bounce is small against the wider trend. The 6 October fixing is still 0.76% below the 29 September reference rate. For context on how these daily fixings differ from the live prices quoted above, see our sister site's explainer on ECB reference rates versus live forex quotes. Chart: EUR/USD.

The rest of the majors

The softer dollar showed up across the 6 October fixings:

• GBP/USD fixed at 1.3276, up 0.39%. Investing.com reports that Morgan Stanley is betting against the pound ahead of the UK budget.
• AUD/USD fixed at 0.6982, up 0.31%. FXStreet says the pair traded around 0.6980 as easing US Treasury yields supported it and markets priced a Fed hold in October.
• NZD/USD fixed at 0.5617, up 0.47%.
• USD/JPY fixed at 158.09, down 0.09%, still close to the 158 area.
• USD/CAD fixed at 1.4250, almost unchanged. FXStreet reports the pair later traded around 1.4240, off recent highs near 1.4300, though falling oil prices leave the loonie vulnerable.
• USD/MXN saw the biggest move, with the fixing down 1.13% to 17.945.

Central banks and data in the news

Fed. UOB's Alvin Liew, quoted by FXStreet, says weaker September payrolls and softer wage growth have reduced expectations for an October rate hike, with markets now focused on September CPI.

US trade. investingLive reports the August US trade deficit widened to $105.6 billion, worse than the $102.0 billion expected, as imports rose 4.3%.

Canada trade. Canada posted a C$4.2 billion surplus in August against $1.55 billion expected, according to investingLive. It was the sixth monthly surplus in a row.

ECB. Investing.com reports that ECB chief economist Philip Lane cautioned on inflation pass-through. The ECB also published an interview with Lane and speeches by Frank Elderson and Piero Cipollone on Tuesday.

RBA. investingLive reports that Australian consumer sentiment slumped after the latest RBA hike, while Westpac expects another hike in November.

What to watch next

1. Fed minutes. FXStreet frames the euro's move as coming ahead of the release of the Fed minutes.
2. US September CPI. UOB says this is now the market's main focus for the Fed path.
3. US ADP data. investingLive's daily calendar lists the weekly ADP release as the main US item in a light session.
4. National Bank of Poland, 7 October. ING, cited by FXStreet, expects the policy rate to stay at 3.75%.
5. French fiscal steps and the OAT-Bund spread. The euro's rebound has rested on this narrowing, per investingLive.
6. UK budget. Morgan Stanley's bearish pound position puts it on the radar for sterling traders.

Chart: US dollar index.