- Pound (GBP) is rising, adding to last week’s gains
- BoE rate decision is on Thursday
- Euro (EUR) falls after Fitch lowers France’s credit rating
- French bond yields rise, but the CAC also rises 1%
The Pound-Euro (GBP/EUR) exchange rate is rising, adding to modest gains from last week. The pair gained 0.23% in the previous week, settling on Friday at €1.1569. It traded between €1.1512 and €1.1595. At 11:00 UTC, GBP/EUR trades 0.12% at €1.1569
The euro is under pressure after rating agency Fitch downgraded France’s credit rating late on Friday. Fitch lowered France’s rating to A+ from AA-, citing concerns over rising government debt, increased political polarisation, and doubts over the fiscal outlook. There are increasing questions over France’s ability to pass budget reforms.
The French government collapsed last week after a failure to unite lawmakers behind a plan to reduce government expenditure. A new government under Lecornu is only expected to be able to deliver watered-down fiscal reforms.
Following the move, French bonds are underperforming southern European peers. The cost of France’s borrowing is now higher than that of countries on Europe’s periphery whose finances have typically been more fragile.
Whilst French bond yields are rising sharply, demand for French stocks appears unimpacted, with the CAC index rising over 1% on Monday.
The eurozone economic calendar is quiet today, although attention will be on ZEW economic sentiment figures tomorrow and the final reading of eurozone inflation data on Wednesday.
Last week, the ECB left interest rates unchanged at 2% for a second straight meeting.
The pound is rising on Monday ahead of a pivotal week for central bank decisions, where the BoE is expected to leave rates unchanged at 4%, significantly above the ECB’s 2% level.
With inflation in the UK almost double the BOS 2% target and attention firmly on finance minister Rachel Reeves’ autumn budget, the UK central bank is likely to remain on hold until early next year.
Reeves is expected to increase taxes as she looks to cover a black hole in government finances of £20 billion to £40 billion.