Euro: Trading near 1.16 against US Dollar as yields rise – Danske Bank

Market impact: Mixed, with a modest EUR/USD-supportive bias near term.

The key market variable is the relative yield adjustment: German 10-year yields have risen roughly 50 basis points since early July versus almost 40 basis points for US Treasuries, while both curves have steepened. That narrows the relative-rate disadvantage for the euro and can support EUR/USD through improved carry appeal and reduced expectations of aggressive ECB easing. However, because US yields are also higher, the signal is not an outright dollar-negative catalyst.

The euro’s upside case is reinforced by resilient euro-area activity: the August services PMI remained expansionary and the manufacturing PMI reportedly rebounded, led by Germany. Confirmation in the final composite and services readings could strengthen the view that European growth is stabilizing, potentially keeping Bund yields elevated and providing support around the 1.16 area.

The main offset is the US data and policy channel. The softer ADP payroll increase points to weaker hiring momentum ahead of the official employment report, which could pressure the dollar if confirmed. Yet ADP has historically been an unreliable guide, while the strong US services PMI, solid demand, and firmer hiring indicators argue against assuming a decisive US slowdown. Fed communication—particularly any indication that persistent inflation could require tighter policy—could quickly restore dollar demand and reverse the EUR/USD yield advantage.

Trading interpretation:

EUR/USD is likely to remain highly sensitive to the US–German yield spread and upcoming US labor data, rather than the PMI figures alone. A further rise in German yields without a comparable move in Treasuries would be euro-positive; a renewed rise in US yields or hawkish Fed repricing would be bearish. The immediate bias is therefore slightly supportive but vulnerable to reversal, with the medium-term direction dependent on whether European growth resilience becomes more credible than the US slowdown narrative.