Euro under pressure amid political woes in France
The resignation of the very recently installed French Prime Minister yesterday morning – after he failed to garner support for his new cabinet – caught markets on the hop. It saw the euro quickly fall to lows for the day of around $1.1650 and £0.8675 against the dollar and sterling, with the single currency only marginally firmer this morning trading at about $1.1680 and £0.8690 respectively. While President Macron has tasked the outgoing PM to renegotiate with political parties over the next couple of days to try to secure “stability for the country”, it remains to be seen if anything comes of this, and political uncertainty may continue to weigh on the euro intermittently over the coming days and weeks (and possibly longer). Meanwhile, sterling has also recovered some ground against the dollar, having fallen to a low of $1.3415 in yesterday’s trading, and is back up at around $1.3440 this morning.
Not surprisingly, French government bonds underperformed as the latest political upheaval reinforced concerns about the country’s large budget deficit (north of 5% of GDP), with 10-year yields rising by around 7bps and the spread over equivalent German yields widening out by about 5bps. Elsewhere in bond markets, US and UK 10-year yields rose by around 3bps and 5bps respectively. In equity markets, French stocks underperformed, shedding almost 1.5% on the day, while European indices generally were off less than half a percent; in the US, the Nasdaq gained around 0.7% on the day, boosted by OpenAI’s deal with chipmaker AMD.
In the Euro area, retail sales volumes inched up in August, increasing by 0.1% on the month, only partially reversing July’s 0.4% decline. Sales over the three months to August increased by 0.2% versus the three months to May, pointing to continued modest growth in overall consumer spending in the zone.
In remarks yesterday, ECB Chief Economist Philip Lane indicated that interest rates are likely to remain on hold in the period ahead. In terms of the risks to the inflation outlook, he noted that an “increase in the likelihood or intensity of downside risk would strengthen the case that a slightly-lower policy rate might better protect the medium-term inflation target; while, alternatively, an increase in the likelihood or intensity of upside risks would indicate that maintaining the current policy rate would be appropriate in the near term.”
Looking to the day ahead, economic data due include the ZEW investor sentiment index in Germany/Euro area and consumer credit and the New York Fed inflation expectations survey in the US, while a number of Fed and ECB members are scheduled to speak over the course of the day. It is Budget 2026-Day here at home, with the likely measures well ‘leaked’ at this stage.