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Euro remains on the back foot as France unrest dents sentiment
- EUR/USD trades lower as political unrest and fiscal concerns in France weigh on the Euro.
- The US Dollar and US Treasury yields stabilise following last week’s sharp correction.
- Traders expect the Fed and ECB to hold rates in October, while further hikes by year-end remain possible.
The Euro (EUR) trades on the back foot on Monday as political concerns in France weigh on the currency, helping the US Dollar (USD) pause last week’s correction. At the time of writing, EUR/USD trades around 1.1215, down 0.21% on the day.
Analysts at Rabobank observe that the Euro’s recent underperformance is unfolding against a fraught geopolitical backdrop, noting that “while the world grapples with the energy shock emanating from hot wars in Europe and the Middle East, French President Macron continues to grapple with political unrest at home.”
They highlight that “tensions ran high over the weekend as widespread protests erupted into rioting and looting, with images of the burning of the historic town hall in Limoges circulating on social media and about 1000 police officers reported injured,” underscoring how intensifying domestic instability in France is feeding into broader concerns over Europe’s political risk profile.
The US Dollar and US Treasury yields corrected sharply lower last week as an AI-led equity sell-off prompted traders to rotate into government bonds. However, both are showing signs of stabilisation on Monday. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.95 after falling to 101.58 last week. Meanwhile, the benchmark 10-year US Treasury yield stands near 5.10%, recovering from Thursday’s low of 5.03%.
On the monetary policy front, traders widely expect both the Federal Reserve (Fed) and the European Central Bank (ECB) to leave interest rates unchanged at their October meetings. However, expectations of additional rate hikes by year-end remain in place as inflation stays above both central banks’ respective 2% targets. Final data released on Friday showed that the Eurozone Harmonized Index of Consumer Prices (HICP) rose 3.8% YoY in September, while core HICP increased 2.5%.
However, ECB officials remain divided over the pace of further tightening. Some policymakers point to limited second-round effects from higher Oil prices and growing downside risks to economic growth, while others warn that persistent inflation could require additional rate hikes.
US inflation surprise keeps Fed on hold call intact
Economists at Deutsche Bank note that the latest inflation data have come in on the strong side, with “headline CPI rose +0.65% in September, taking the annual rate from 3.4% to 3.7%, while core CPI increased +0.33%, with its annual rate up two-tenths to 2.6%.” They add that “PPI was also stronger than expected on Thursday, and our economists’ current tracking for September core PCE is +0.36% month-on-month, or about 3.14% year-on-year absent revisions.”
According to Deutsche Bank, “these numbers have recently mattered for markets: the sharp rise in the September PMIs helped drive an almost 15bp increase in both 2yr and 10yr Treasury yields on September 23.” Even so, the bank says its economists “still expect the Fed to remain on hold at next week’s October meeting, allowing policymakers more time to assess the underlying inflation trend and the tightening in financial conditions from the recent rise in global yields.”
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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