Euro extends decline as political uncertainty weighs in France
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Daily Currency Update
Shifts in the risk profile of eurozone inflation will likely impact ECB policy decisions and elevate the risk of undershooting the 2.0% target rate which would support a "slight" reduction in borrowing costs, ECB chief economist Philip Lane said on Monday. The ECB has cut rates by 2% in 2025 to June this year, and markets see virtually no chance of further cuts from the Central Bank this year. Lane added that policy decisions will remain data dependant and, on a meeting-by-meeting basis.
As finance minister Rachel Reeves' annual budget looms in November, Britain's long-term borrowing costs are the highest among G7 advanced economies. Sticky inflation and fiscal worries are depressing the value of bonds, known as gilts, while the BoE is also actively selling its holdings into weak UK debt markets, recording losses. While taxpayers previously gained from the bond sales they are now costing £22 billion pounds annually.
The Federal Reserves dilemma - sticky and persistently high inflation coupled with a softening labour market while policymakers have significantly divergent views regarding the appropriate Federal Funds rate, most notably into 2026. Adding insult to injury true independence for a central bank consists of its ability to make mistakes without facing political consequences. The Trump administration is waiting for a mistake.
Key Movers
French Prime Minister Sebastien Lecornu, resigned yesterday after a mere month in his role. The Euro fell 0.65% and the premium investors demand to hold French Government debt, rather than benchmark German bonds hit its widest since January this year. France will be unable to present a budget before year end underscoring the depth of political paralysis and will likely lead to increased already high borrowing costs. Markets will nervously watch to see if this malaise spills over into other European countries.
British house prices rose by a slower-than-expected 1.3% in the 12 months to September, the weakest annual increase since April 2024 and was most likely caused by economic and tax uncertainty. Although the broader economic outlook remains uncertain it is clear that high borrowing costs and an uncertainty around the size of expected tax hikes have dented the housing market in the UK.
The President of the Kansas City Federal Reserve Bank, Jeffrey Schmid, delivered rather hawkish remarks saying the Fed must maintain its inflation credibility and stresses that it is stickily high and that it is worrying that price increases are becoming more widespread. The US Dollar has staged a relative comeback this week with markets reducing expectations for interest rate cuts.
Expected Ranges
- GBP/USD: 1.3420 - 1.3480 ▲
- GBP/EUR: 1.1480 - 1.1530 ▲
- GBP/AUD: 2.0365 - 2.0435 ▲
- EUR/USD: 1.1655 - 1.1715 ▲