Markets Focus on French Sovereign Debt Amid Rising European Bond Yields
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Daily Currency Update
On Thursday, ECB council member Klaas Knot expressed support for market expectations of one or two more interest rate cuts, as inflation moves back towards the European Central Bank’s 2% target. Last month, the ECB cut borrowing costs by 25 basis points and remains open to further action. This flexibility follows data showing stronger-than-expected inflation and wage growth. All council members have emphasized that future rate decisions could be strictly data-dependent.The Bank of England left interest rates unchanged yesterday, as widely expected. However, the Monetary Policy Committee (MPC) hinted that they are edging closer to rate cuts. This has raised market expectations for the first reduction in UK borrowing costs to occur in August. Speculation has intensified due to inflation figures aligning with the 2% target.
The US Dollar edged higher on Thursday, driven by interest rate differentials as European countries begin to lower their rates. Contributing to the Dollar’s strength is increasing political turmoil in Europe, prompting investors to seek the “safe haven” Dollar. Earlier this week, the number of people filing for unemployment assistance fell, though not as much as markets had anticipated
Key Movers
The gap between France’s 10-year bond yields and Germany’s rose to its highest level since 2017 this morning, as investors demanded higher returns due to the perceived risk of French debt. The EU also initiated disciplinary procedures against France and several other European countries for allowing their respective debts to escalate. Additionally, Standard & Poor’s downgraded France’s credit rating to AA- last month.The Pound received a boost today from retail sales, which exceeded expectations in May. The figure peaked at 2.9%, compared to a 1.8% decline in April. However, it is worth noting that British public debt has risen to its highest level since 1961, which will create pressure for the next government after the elections on July 4th.
US business surveys are due for release shortly, providing markets with insight into how the US economy is coping with prolonged higher interest rates. Later today, the release of the Purchasing Manager’s Index could indicate business confidence and economic activity in the US. The US Dollar has broadly traded higher this week, as markets remain uncertain about the timing and scale of future interest rate cuts.
Expected Ranges
- GBP/USD: 1.2625 - 1.2685 ▼
- GBP/EUR: 1.1820 - 1.1865 ▼
- GBP/AUD: 1.8975 - 1.9040 ▼
- EUR/USD: 1.0660 - 1.0715 ▼