Euro lags as French risks ripple across Eurozone

• EUR/JPY slips towards 177.45 as France’s political risks spill over into other euro-area nations.
• An unchanged policy-rate decision is expected from the ECB at its October policy meeting.
• The BoJ’s Governor Ueda reaffirms that the central bank is pursuing a gradual course of monetary tightening.

A 0.13% decline leaves the Euro (EUR) trading around 177.45 against the Japanese Yen (JPY) during Wednesday’s European session, as the single currency lags its major peers.

Selling pressure on the single currency persists, with market experts arguing that the fallout from France’s political crisis is already reaching other parts of the Eurozone.

French political upheaval spreads bond contagion and weighs on the Euro

The latest political upheaval in France has reverberated through European markets, according to Deutsche Bank analysts, who observe that “those market concerns around French debt cascaded across other countries and asset classes too.” As evidence, they note that “the Italian 10yr spread over bunds was also up +4.7bps on the day to 111bps, whilst Spain’s was up +1.2bps to 62bps.” Shares also came under pressure: “the STOXX Banks index (-2.07%)” reached a four-month low, alongside “even bigger declines for the French banks, including Société Générale (-3.41%), Crédit Agricole (-2.64%) and BNP Paribas (-2.48%).” Turning to currencies, Deutsche Bank says that “all that caused fresh pressure for the Euro itself, which weakened -0.23% against the US Dollar to close at $1.1213.”

For Rabobank’s RaboResearch team, the fixed-income market’s response amounted to “an ugly bond reaction to the ugly protests and looting in France (and Belgium and Italy, following earlier peaceful protests in Spain and Portugal) with 10-year French yields +13bps, Italian +8bps, and German +3bps.” The speed of the tightening in funding conditions is apparent in their observation that “even if we only focus on fiscal metrics, French 10-year borrowing costs are now half a rate hike higher than Friday,” they emphasise.

Policymakers now face what Rabobank describes as “the hypothetical whispered realpolitik binary”, a choice “between the ECB bailing France out if needed, at a cost to the Euro and the fury of Germany, and not doing so at a cost to EU economic, political, and market stability.” Another possibility is posed by the bank in the question: “Could the ECB bail everybody else out from French contagion and leave Paris to sort out its mess?” With those considerations in mind, Rabobank’s assessment is that “whatever happens now, more volatility seems far more likely than a ‘reversion to mean’.”

As for monetary policy, market experts anticipate no change in European Central Bank (ECB) interest rates when it meets later this month.

ECB set to keep rates unchanged as Danske Bank maintains 2.50% deposit-rate forecast

An unchanged rate decision remains the forecast of analysts in Danske Bank’s Danske Research Team. They say they “published a new ECB call yesterday,” reaffirming that the central bank is expected to “keep policy rates unchanged on Thursday 29 October, with the deposit rate at 2.50%, in line with consensus and market pricing.” In their view, the existing policy setting is still appropriate, making the ECB likely to retain its current rate configuration at the forthcoming meeting.

The Japanese Yen, by contrast, is advancing against its peers other than the Australian Dollar (AUD), as Bank of Japan (BoJ) Governor Kazuo Ueda reaffirms a gradual approach to policy normalisation.

Ueda signals cautious hawkishness as Japan’s wage–price cycle strengthens

A score of 7/10 from FXS Speechtracker places the speech slightly below BoJ Governor Ueda’s historical baseline of 7.4/10. Nevertheless, its focus on “underlying inflation near 2%” and a positive wage–price cycle conveys a mildly hawkish bias. Ueda draws attention to both demand-led and supply-driven inflation, a tight labour market and the prospect of steady increases in long-term rates if the short-term policy rate rises. This suggests increasing confidence in gradual policy normalisation while financial conditions remain accommodative.

Caution over market intervention remains evident, however: Ueda confirms that the basic approach to bond tapering is unchanged and declines to signal emergency JGB measures in advance. His message stresses the need for appropriately calibrated policy to anchor core inflation near 2% and stabilise the JGB market. That supports the view that expectations of a slow but sustained retreat from ultra-loose policy could lift the Yen, although the BoJ continues to be guided by the data and alert to market instability.