Lagarde’s comments could keep a December rate increase 'in play'

Matthew Ryan, CFA Ebury

Ongoing political uncertainty in France continues to weigh on the euro, which is on course to be the worst-performing major currency in October.

Late last week, the spread between French and German 10- year government bond yields widened to 175 basis points, its highest level since the 2011 euro crisis, and it remains elevated despite a partial correction. That said, there are few signs of panic so far.

The euro’s decline has been relatively contained, suggesting markets view this as a France-specific issue rather than a broader threat to the eurozone, which should limit the scope for a deeper sell-off unless the political situation escalates further. We also have the small matter of the October ECB meeting on Thursday, which has so far gone largely under the radar. We don’t expect any change, nor is there a strong case for a hike.

Lagarde has reiterated that second-round effects are absent, growth appears soft and the fiscal situation in the Eurozone’s enfant terrible - France - should keep the hawks in check for now.

We expect Lagarde to warn over inflation risks, however, and that should act to keep a December rate increase in play.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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