Lagarde’s 'surprisingly dovish' stance puts October ECB hike in doubt

The common currency had a rough week due to unsettled trading in the French bond market, which spilled over into the other peripheral bonds by the end of the week. A higher than expected September inflation print, 3.8% against a 3.6% consensus, did nothing to help the common currency, particularly after the surprisingly dovish remarks from ECB President Lagarde during the week, which have made clear that the bar for an October rate increase from the Governing Council is now very high indeed.

For now, the worries remain squarely focused on France, whose sovereign yield spread to German Bunds blew out to the widest since the Eurozone crisis in 2011 following the largest weekly widening in said spread in seventeen years.

By week's end we saw hints of a stabilisation in both bond markets and the common currency, though these fears are unlikely to go away given that the political deadlock in Paris remains very much unresolved after PM Lecornu’s budget proposals were met with scepticism from the fiscal watchdog. In the absence of key economic or monetary policy news, French political developments and the bond market reaction to them will remain key.