Euro firm despite French government collapse

The euro is holding its own against the dollar notwithstanding the French government’s collapse after losing the no-confidence vote in parliament last night. It is trading at about $1.0540 this morning, broadly matching yesterday’s high which followed weaker than expected economic data in the US. It is little changed against sterling at about £0.8275 (albeit this is just shy of its 2024 low of £0.8260), while the pound has strengthened to a fresh high for the week of almost $1.2740 against the US currency.

US bond yields fell yesterday on the back of the softer US economic data, while German and UK yields ended slightly higher on the day. French bonds are performing relatively well this morning, with 10-year yields slightly lower so far.

In remarks yesterday, Fed Chair Powell said the “US economy is in very good shape”, meaning the central bank “can afford to be a little more cautious” in moving interest rates down to a neutral level. Whether such cautions extends to keeping rates on hold at this month’s meeting, or at one of its meetings early next year, remains to be seen, although the market still believes there’s a good chance it will cut again this month.

ECB’s Christine Lagarde says “our battle against inflation is nearing completion (but it is) not mission accomplished yet”, adding that “we have a bit of work to do, but we are in sight of the 2% target”. Her comments suggest a 25bps cut in rates is the most likely outcome of next week’s meeting, as indeed the market is pricing in.

It is a relatively quiet day ahead in terms of economic data, with retail sales in the Euro area, weekly jobless claims in the US, and the construction PMI in the UK.