The euro has held up surprisingly well to the political wrangling in France. Admittedly, the passing of the no confidence vote was already priced into the value of the common currency, but the fact that the euro actually rallied on Thursday is notable and suggests that markets are not overly concerned at the government’s inability to agree on a fiscal stimulus package.
This perhaps stems from the belief that the ECB will overlook the malaise for now, particularly given that the turmoil has not led to any sort of blow up in yields, or contagion within wider fixed income markets. All eyes next week will be on the December policy announcement from the Governing Council.
Another 25 basis point rate cut appears to be set in stone. We don’t think that the ECB will entertain the idea of a jumbo 50bp rate reduction just yet, but president Lagarde could keep the door open to such a move during her press conference - we’ll have more on this on Monday.
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