Euro gives up Powell-related gains

A potential political crisis in France (yet another one) weighed on the euro yesterday, as the Prime Minister of the minority government said he would call a confidence motion relating to budget proposals to reduce the country’s large public deficit. The single currency has given up most of Friday’s post-Powell gains against the dollar, falling to a low of circa $1.16 before recovering slightly to around $1.1620 currently, and has also lost some ground against sterling to trade below £0.8650. The pound has edged down from Friday’s best levels against the dollar to about $1.3460 this morning. Speaking of potential crises, Donald Trump has informed Fed member Cook that he is removing her from her position on the central bank’s Board of Governors, but she has responded by saying he does not have the authority to do so and will not be quitting. Long-dated US bond yields have nudged up overnight on the back of this.

 French stocks and bonds underperformed. The CAC 40 shed around 1.6% as European stocks generally were down a bit less than 1%. French government 10-year bond yields rose by almost 10bps, which spilled over to some other markets including Italy and Spain, while equivalent German yields were about 4bps higher on the day. US 10-year yields reversed some of Friday’s Powell-related fall, increasing by 3bps yesterday, and as mentioned they have nudged higher (by another 3bps or so) in overnight trading.

ECB President Christine Lagarde says higher tariffs will only have “a small impact” on the Euro area economy. She notes that “growth is relatively modest, but resilient and on its way up with the fundamentals such as consumption and investment looking good at the moment.” With inflation running in line with its 2% target also, the market expects steady interest rates into year-end.

Sentiment among companies in Germany improved in August according to the latest ifo Business Climate Index, which rose to 89.0 this month from 88.6 in July. The increase was all due to improved expectations among companies, with the “current situation…assessed as slightly worse”.

Looking to the day ahead, there are a number of US economic data releases due including the Conference Board’s consumer confidence index, house prices, and durable goods orders.