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0.8403: Euro struggles to find a bottom against British Pound as violence shocks France 

  • EUR/GBP extends losses to levels near 0.8400, accumulating a 2.3% sell-off in a bit more than three weeks.
  • Violence in France, high Oil prices, and weak Eurozone data is crushing the Euro.
  • In the UK, macroeconomic data surprised last week and undermined support for the British Pound.

The Euro (EUR) keeps losing ground against the British Pound (GBP) on Monday, as student protests in France turn violent, putting additional pressure on the already strained President Emmanuel Macron's government. The EUR/GBP pair fell to a fresh 16-month low at 0.8403 in Monday’s early trading, before picking up to 0.8412 at the time of writing, and features a 2.3% sell-off in a little more than three weeks.

Investors remain away from the common currency on Monday, spooked by the images of extreme violence in France where students' protests turned aggressive during the weekend, causing damage and looting in most of France's major cities. 

The police reported 1,800 arrests, and prompted the resignation of Interior Minister Laurent Nunez, which was rejected by President Macron. Pressure on the president, however, remains on the rise ahead of the end of its term, with far-right and far-left parties looking to capitalise on dissatisfaction with centrist policies and the high cost of living at the voting polls while the country’s debt grows out of control.

Macroeconomic data favours the Pound

The macroeconomic docket is thin in the UK and the Eurozone on Monday, but recent data has been more favourable for the Pound than for the Euro, and boosted expectations that the Bank of England (BoE) might hike interest rates before the end of the year. The UK Gross Domestic Product (GDP) released last week showed the economy picked up unexpectedly in September after a slight contraction in August, buoyed by the strong performance of the industrial sector. 

Analysts at Commerzbank argue that recent UK data “gives the Bank of England room to raise rates without running the risk of putting additional pressure on an already weakening economy.” “The market appears confident that a viable middle ground can be found,” says Commerzbank in a note.

In the Eurozone, Industrial Production accelerated its decline after contracting for the third consecutive month in August. Also last week, the final Harmonised Index of Consumer Prices (HICP) confirmed that Eurozone inflation accelerated to a 3.8% year-over-year pace in September, its highest level in three years, increasing concerns about stagflation.

To make things worse, Oil prices show an 8% appreciation in October, despite Monday’s mild decline. Brent prices remain steady, well above the key $100 level, putting additional pressure on Eurozone economic growth and keeping consumer inflation high. This poses a growing challenge for the European Central Bank (ECB), which may ultimately be forced to choose between hiking rates to fight inflation or lowering them to support growth - the worst nightmare for policymakers and a scenario that might send the Euro into a tailspin.

Author

Guillermo Alcala

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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