Euro Remains Subdued as German Politics and French Debt Offset Strong PMI Data

The euro held a defensive stance against the U.S. dollar on Wednesday, trading near 1.14193, extending a decline of about 0.5% for the week and hovering around a two-and-a-half-month low. Despite the latest eurozone and German PMI data beating expectations, ongoing political uncertainty in Germany and rising French debt risks prevented the currency from gaining meaningful traction.

**PMI Improvement Fails to Mask Internal Divergence**

Data showed the eurozone's October manufacturing PMI flash reading came in at 45.9, above the expected 45.1 and the prior 45.0, while the services PMI flash reading stood at 51.2, slightly below the expected 51.5. In Germany, the manufacturing PMI flash reading rose to 42.6, significantly beating the expected 40.8, but remains firmly in contraction territory. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, noted that the eurozone economy contracted slightly for a second consecutive month, with ongoing manufacturing weakness largely offset by modest services growth. Although the data came in better than expected overall, internal divergence is evident, and services new orders fell for a second straight month, with expansion slowing to the lowest level in eight months, failing to effectively boost market confidence.

**Political and Debt Risks Dominate Sentiment**

Compared with marginal improvements in economic data, market focus was more concentrated on political risks within the eurozone. Uncertainty in Germany's political landscape continued to build, while concerns over France's debt issues also intensified. According to reports, persistent political instability in France is creating uncertainty for businesses and households, becoming a key constraint going forward. These structural risks overshadowed the boost from near-term data improvements, leaving the euro unable to mount an effective rebound against a broadly stronger dollar backdrop.

**Rate Cut Expectations Tempered**

Notably, price-related details in the PMI report added variables to European Central Bank decision-making. De la Rubia mentioned that services costs and selling prices accelerated in October compared with the previous month, potentially reflecting sustained wage pressures. This signal supports the view that the ECB will cut rates by only 25 basis points in December, rather than the 50 basis points some market participants have discussed. Rate cut expectations have narrowed somewhat, but this has not translated into direct support for the euro, as the political risk premium remains dominant.