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Euro slides to a 16 month low against the pound as French riots revive debt fears

By Forexuro Desk. Market news and analysis, not financial advice. All articles

A weekend of riots across France has put French debt back in the spotlight. The euro fell to its weakest level against the pound in 16 months on Monday, French borrowing costs jumped, and traders now face a week of inflation data with the euro looking like the market's weak link.

The euro started the week on the back foot. Violent protests over the cost of living and failing public services spread through Paris, Lyon, Marseille and other cities on Saturday and flared again on Sunday night, and by the time Asian markets opened the single currency was sliding. Against the pound it touched its lowest level in 16 months. Against the dollar it gave back part of last week's rebound. French government bonds sold off, Paris stocks lagged the rest of Europe, and the gap between French and German borrowing costs widened again. Elsewhere the picture was calmer: oil eased from a five month high, the Chinese yuan hit a four year high after strong growth figures, and Canada's inflation rate came in a touch below forecasts.

Close up of several fifty euro banknotes fanned out in a row, showing the large orange 50 numerals and the European stars
The euro is carrying the cost of France's unrest, with traders watching whether the pressure on French bonds spreads to the rest of the bloc.

A weekend that shook Paris

More than half a million people joined demonstrations on Saturday, and the marches turned into widespread looting and arson in several cities, Al Jazeera reported. France had deployed about 60,000 police and other security forces, and Interior Minister Laurent Nunez admitted that it was not enough and that police had lost control in some places. He offered to resign. President Emmanuel Macron refused, telling him to stay on, keep the chain of command intact and explain the planning and intelligence failures behind the violence.

The scale of the damage became clearer on Monday. Some 2,400 people were arrested, nearly 1,000 officers were injured and one protester died of a cardiac arrest on Saturday, while a retail trade body said almost 3,000 shops had been affected, Reuters reported via Investing.com. Prime Minister Sebastien Lecornu asked some local authorities to impose curfews and did not rule out a state of emergency. "My determination to restore order is absolute," Lecornu told reporters. Unions have already called a fresh round of strikes and rallies for early next month, and similar cost of living protests took place over the weekend in Italy, Belgium and Albania, where high fuel prices linked to the Iran war are adding to the strain.

Why bond traders care

For markets the riots matter less as a security story than as a budget story. France's minority government is trying to push through next year's budget, which aims for about €54 billion of savings, and the unrest makes that harder. Public debt stood at roughly €3.6 trillion, or 119% of GDP, in the second quarter, and this year's deficit is projected at 5.4% of GDP, according to DailyForex. Budget fights have already brought down two of Lecornu's recent predecessors, and the presidential election is about six months away, with Marine Le Pen of the far right leading many polls.

Investors reacted quickly. France's 10 year yield jumped more than 10 basis points on Monday, close to its highest level in decades, while 2 year and 30 year yields rose 6 and 8 basis points, CNBC reported. Benchmark French borrowing costs are now around their highest since 2002, French yields sit above those of Italy and Greece, and the premium over German Bunds is close to levels last seen during the euro area debt crisis. The CAC 40 was down 1.7% in the afternoon in Paris, with banks under particular pressure. Overseas investors now own close to 60% of French government debt, up from about 48% at the start of 2022, which can make the market more jumpy when global investors turn cautious.

Mike Bell of RBC BlueBay Asset Management summed up the bind on CNBC. "It looks like either the bond markets riot, or the people riot, or both," he said. Not everyone is alarmed. KBRA's Ken Egan pointed to solid demand at French debt auctions last week, and Goldman Sachs strategist Sharon Bell said she did not think conditions justified emergency help from the European Central Bank, although the ECB would likely step in if spreads began to disrupt market liquidity.

The euro takes the hit

The euro fell about 0.25% to $1.1210 on Monday, CNBC reported, and EUR/USD was near 1.1222 in the New York morning, down from 1.1238 at Friday's close, according to MT Newswires. The bigger move came against sterling. EUR/GBP dropped to 0.8403 early on Monday, a 16 month low, extending a slide of about 2.3% in a little over three weeks, FXStreet noted. Our guide to GBP/USD and the pound explains why sterling crosses tend to react sharply when the two economies move apart.

Line chart of EUR/GBP over four weeks, peaking at 0.8608 and falling steadily to 0.8419 in the New York morning on Monday
EUR/GBP has fallen from about 0.861 to below 0.842 in four weeks, with the riots adding to the slide. Chart by Forexuro. Data: Yahoo Finance EUR/GBP (EURGBP=X) at the New York close each trading day, with Monday's latest New York morning reading.

France is not the only weight on the euro. Euro area inflation was confirmed at 3.8% in September, its highest in three years, while industrial production fell for a third month in August, and oil is up about 8% this month. That leaves the ECB facing a choice between fighting inflation and protecting growth, FXStreet argued. Natural gas prices also hit a fresh four year high on Monday, according to CNBC. Commerzbank's Thu Lan Nguyen told CNBC that for EUR/USD, the response of the Fed and the ECB to the oil shock matters more than the oil price itself.

There is a counterweight. Analysts quoted by CNBC noted that the euro's slide at the turn of the month, when it fell more than 1% as the French spread over Bunds widened by about 40 basis points to above 150, was far bigger than Monday's move. The euro usually comes under sustained pressure only when French stress spreads to the rest of the bloc. UBS analysts quoted by Investing.com said they expect the euro to recover from oversold levels, arguing that markets have become too gloomy about Europe.

The dollar steadies but does not run

The dollar index was little changed near 101.87 on Monday after losing 0.4% last week, a drop that ended a four week winning streak, Investing.com reported. Federal Reserve officials are now in their quiet period before next Wednesday's decision, and Chair Kevin Warsh's remarks on Friday pushed traders away from betting on an October hike. CME FedWatch data cited by Investing.com put the chance of no change at about 87%, and Deutsche Bank economists still expect the Fed to stay on hold, FXStreet reported. US stock futures bounced after Friday's tech led selloff, which helped the more risk sensitive currencies.

Bar chart of Monday's change against the US dollar since the Friday close: Australian dollar up 0.62%, New Zealand dollar up 0.36%, Canadian dollar up 0.23%, offshore yuan up 0.06%, pound down 0.05%, euro down 0.20%, Swiss franc down 0.21% and yen down 0.25%
Commodity currencies led on Monday while the euro, franc and yen slipped against the dollar. Chart by Forexuro. Data: Yahoo Finance FX rates, Friday New York close to the latest Monday morning reading in New York.

The yen barely moved, with USD/JPY near 158.15. Bank of Japan Governor Kazuo Ueda said underlying inflation is now quite close to the 2% target, which keeps further rate rises in play, but worries about Prime Minister Sanae Takaichi's spending plans and the risk of intervention near current levels are keeping traders cautious. The Australian dollar was the standout, up about 0.5% near 0.6980 as China's data and firmer stock futures lifted the mood.

China beats forecasts and the yuan climbs

China's economy grew 4.5% from a year earlier in the third quarter, up from 4.3% in the second quarter and ahead of the 4.4% expected in a Reuters poll, Reuters reported. Growth on the quarter was 1.2%, also above forecasts. The National Bureau of Statistics said output grew 4.6% over the first three quarters, while FXStreet noted that industrial production rose 5.5% and retail sales 1.1% in September, both better than expected. The offshore yuan strengthened to about 6.68 per dollar, its strongest level in more than four years, according to CNBC. The beat eases pressure on Beijing for bigger stimulus, which matters for the Australian and New Zealand dollars, both closely tied to Chinese demand.

Oil eases on the Russia waiver

Brent fell $1.45, or about 1.3%, to $108.41 a barrel by midday in London, after settling on Friday at its highest since May, while US crude traded at $101.09, Reuters reported via Yahoo Finance. Traders took profits after President Donald Trump signed an order waiving some sanctions and tariffs on Russian exports, following a deal for Russia to supply diesel that starts at about 2.3 million barrels this month and rises to around 7.6 million barrels a month. The Gulf still limits the downside: Iran's Revolutionary Guards said a tanker exploded after hitting a mine on Sunday, and Kpler estimated that Gulf crude flows fell to a seven day average of about 8.5 million barrels a day last week from more than 20 million the week before.

The Canadian dollar was already firmer before Canada's inflation report and held its gains afterwards. Statistics Canada said consumer prices rose 3.1% from a year earlier in September, up from 3.0% in August, with gasoline up 27.8%. Excluding gasoline, inflation slowed to 2.2% from 2.4%. The result was a little below the 3.2% forecast in a Reuters poll, and the Bank of Canada's core measures cooled, with the median at 1.9% and trim at 1.8%, Reuters reported via MarketScreener. Even so, the loonie firmed about 0.3% to C$1.4096 per US dollar and two year yields rose 7.7 basis points. Markets expect the Bank of Canada to hold at 2.25% next week and to hike in December, and the central bank's Business Outlook Survey later on Monday could shift that view.

Gold edges back toward $4,200

Spot gold rose 0.4% to $4,181.84 an ounce in the European morning and December futures gained 0.5% to $4,202.70, Reuters reported. Softer oil prices took a little heat out of inflation worries after last week's strong US price data, and the CME FedWatch tool showed about a 15% chance of a Fed hike this month against roughly 89% for December. Silver climbed about 1% to $57.53. DailyForex noted that gold has not yet held above $4,200, so Monday's bounce is still tentative. Our guide to the dollar index and gold explains why a steady dollar and lower yields usually give the metal room to rise.

The French story cuts both ways for gold. Stress in European bonds can lift demand for safety, but if it pushes money into the dollar instead, the metal may struggle to break out. For now, gold traders are taking their lead from oil and US yields more than from Paris.

What to watch this week

  • Monday: the Bank of Canada's Business Outlook Survey, plus any word on where curfews will apply in France and how French bonds close.
  • Tuesday: UK jobs figures. Consensus figures gathered by Monex Europe point to unemployment edging up to 5.0%, with total pay growth steady at 3.9%. Germany's ZEW survey and US housing starts are also due.
  • Wednesday: UK inflation, seen rising to 3.3% from 3.1%, with core at 2.7% and services at 3.6%. ECB President Christine Lagarde speaks later in the day. New Zealand's quarterly inflation follows late in the evening in London, with annual inflation seen easing to 3.9%.
  • Thursday: US weekly jobless claims and the euro area's early consumer confidence reading.
  • Friday: Japan's national inflation, with core seen rising to 2.1% from 1.7%, then flash PMIs for the euro area, the UK and the US.

The euro is the currency to watch. The ECB decision is on Thursday of next week, a day after the Fed and the Bank of Canada. The International Monetary Fund said on Friday that the ECB is likely to raise rates by a quarter point at least once more this year, Reuters reported. Any sign that French stress is spreading to Italian or other euro area bonds would make that harder and would probably weigh on the euro across the board. Our guide to interest rates and currencies explains how bond spreads and rate expectations feed into exchange rates.

What this means for signal traders

  • Watch EUR/GBP as well as EUR/USD. The cross has shown the euro's weakness more clearly than the dollar pair, because sterling has had its own support from UK data and Bank of England hike bets.
  • Treat French headlines as event risk. News on curfews, a state of emergency or the budget can move euro pairs within minutes, and spreads often widen when they do.
  • Follow the bond spread. The gap between French and German 10 year yields is the clearest gauge of whether this stays a French problem or becomes a euro area one.
  • Mark the UK data cluster. Jobs on Tuesday and inflation on Wednesday can make GBP pairs swing hard, which also affects EUR/GBP setups.
  • Size gold positions with care. With $4,200 overhead and the Fed decision still ahead, stops just beyond obvious levels can be hit by fast moves. Set the position size from the stop distance, not the other way round.
  • Keep an eye on AUD and NZD. Strong Chinese data and New Zealand's inflation report on Wednesday make both currencies more sensitive than usual this week.

None of this predicts the next move. It describes the conditions any forex or gold signal will face in the days ahead.

Sources

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