The latest developments in French politics reflect the realities of the recent election results. No one party can muster a majority, including to elect the influential speaker of the house position in parliament. This leaves a caretaker government in place largely led by officials from President Macron’s party. Threats to France’s fiscal position have, therefore, not worsened, but equally progress to address France’s 5%+ budget deficit remains distant. That is why the French-German government bond spread is trading steady around the 65/70bp area – i.e. narrower than the 85/90bp peak earlier this summer, but wider than the 45/50bp levels that prevailed before President Macron called snap elections. In short, it does not seem like the euro requires a substantial political risk premium currently.
As to the ECB, one might have thought EUR/USD could have done a little better on the view that a September ECB rate cut was now less likely. As discussed in our review, the ECB has made it clear that there is no forward guidance and sticky services inflation now casts doubt on whether the ECB can indeed cut both in September and December. Yet EUR/USD has softened a little. Perhaps this is a function of a slightly less optimistic for world growth, where the ECB has now switched its short term activity assessment to the downside and China’s third plenum has failed to deliver on (unrealistic) expectations of fresh stimulus.
Expect EUR/USD to stay steady near 1.09 today.
Chris Turner
