Euro 'bounces back' as French bonds stabilise – Currency’s fate 'remains tied' to French spreads

After a rough start to the week, French sovereign bonds and the euro both stabilised and bounced back modestly in tandem. Presidential frontrunner Le Pen offered reassurances last week on reining in government spending, which markets appear to have welcomed.

Yet the protests and marches across the country in recent days in support of higher education funding show how hard it will be to strike a balance between shoring up the public finances against keeping the voter base on side.

We remain cautious given prospects for serious fiscal consolidation in France in the long-run remain dim ahead of next year's presidential elections. Markets have scaled back their ECB rate hike expectations as a result of the turmoil in France, which has offset some of the relief for the euro from the calming in global bond markets.

ECB officials Lagarde and Schnabel have a chance to reshape that impression this week ahead of the 29th October meeting, which looks highly likely to deliver a pause. Absent that, the euro’s fate remains tied to French spreads.