At the start of this week, the euro has managed to stay stable, hovering just above the 1.0700 mark against the US dollar. This comes after it dipped to 1.0668 late last week. Meanwhile, the difference in 10-year bond yields between France and Germany saw a slight uptick by 2 basis points yesterday, following a larger rise of 16 basis points over the two preceding days.
This spread is now nearly 80 basis points, a significant jump from around 48 basis points before French President Macron announced a snap election. The current level is the highest since February 2017, and further increases could push it to levels reminiscent of the eurozone debt crisis in 2011-2012.
ECB’s Position and Market Reactions
The increasing spread has caught the attention of European Central Bank (ECB) officials. ECB President Christine Lagarde reassured that the ECB is closely monitoring financial market conditions but hinted that no immediate actions would be taken. Similarly, ECB Chief Economist Philip Lane downplayed the need for support measures for the French bond market, suggesting that the recent changes are more about market adjustments than any disorderly behaviour. Lane also mentioned that while the ECB’s Transmission Protection Instrument (TPI) is important, he doesn’t see any immediate threats to monetary policy.
Lane also indicated that any decision on rate cuts by the ECB might be postponed until September, depending on upcoming data regarding services inflation. He conveyed a cautious outlook, expecting cost pressures to remain low in 2025 and showing a willingness to tolerate short-term inflation changes.
Political Context and Market Impact
At the beginning of the week, the increase in the yield spread was more controlled, partly due to comments made by Marine Le Pen in an interview with Le Figaro. Le Pen assured that she would respect institutional stability and mentioned that if her party, the National Rally, comes to power, they would conduct a fiscal audit before implementing policies such as lowering the retirement age to 60 and exempting under-30s from income tax.
Le Pen’s reassurances have somewhat calmed market fears, leading to a more measured widening of the spread. However, the broader political uncertainty remains, hinting at potential further weakening of the euro as the French elections draw nearer.
In summary, the euro’s recent steadiness and the more controlled yield spread between French and German bonds reflect a mix of market reactions and political reassurances. The ECB is watchful but cautious, adopting a wait-and-see approach to monetary policy changes. Political developments in France will continue to be a key factor in shaping market trends and the euro’s path in the coming months.
Market commentary and analysis from Luca Santos, currency analyst at ACY Securities
