Home Daily Commentaries Bond yields widen amid escalating European political unrest

Bond yields widen amid escalating European political unrest

Conor Fleming
Written by
Conor Fleming

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor spearheads initiatives to encourage businesses in Germany, Switzerland, and Austria to hedge their foreign currency risks with OFX.

| Monday 17 June, 2024

Daily Currency Update

Last week in Europe, there was a significant widening of bond yields between Germany and France. This was driven by political uncertainty following elections in which mainstream parties lost ground to far-right groups. Consequently, the Euro weakened against both the US Dollar and the British Pound. Attention is now focused on the snap elections scheduled for June 30th, called by President Macron in France.

The Pound surged to a 22-month high against the Euro last week. This rise was not only due to Euro weakness but also to the Bank of England’s Monetary Policy Council (MPC) voting 7 to 2 to maintain the interest rate at 5.25%. Markets are now closely monitoring any comments from council members that might indicate a shift from this holding pattern to potential dovish rate cut remarks.

Meanwhile, members of the Federal Reserve revised their earlier projection of three interest rate cuts this year to just one 25 basis point cut expected in Q4. This adjustment is primarily due to persistently high inflation figures, leading some policymakers to question whether inflation is trending back toward the 2% target rate. As a result, the US Dollar rallied strongly last week.

Key Movers

The Euro is likely to face additional losses this week as we approach the snap elections in France, prompted by the rising popularity of Marine Le Pen’s far-right party in recent elections. The primary concern is that far-right parties aim to significantly increase spending, which would exacerbate France’s budget deficit. Additionally, fiscal sustainability is a pressing issue after rating agencies downgraded France’s credit rating last week.

The Bank of England meets next week, with markets now anticipating only one rate cut this year, likely in November. Economic growth in the UK has nearly stalled, with wage inflation remaining stubbornly high. The Pound, on a trade-weighted basis, is at its strongest level since the Brexit vote in 2016. Markets will be closely monitoring polls for the upcoming July 4th elections.

Federal Reserve Chair Jerome Powell stated that policymakers in the US are “content to leave rates where they are until the economy sends a clear signal that either inflation is consistently lower or there is a spike in the unemployment rate.” However, as long as Fed policy remains more hawkish compared to other central banks, the Dollar is likely to benefit over the summer.

Expected Ranges

  • GBP/USD: 1.2645 - 1.2715 ▼
  • GBP/EUR: 1.1810 - 1.1855 ▼
  • GBP/AUD: 1.9165 - 1.9220 ▼
  • EUR/USD: 1.0680 - 1.0735 ▼

Written by

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor first embarked on his financial career journey as a trainee dealer in BNP Paribas in the early 90s. His professional journey also took him to New York, where he assumed the role of Head of Sales with an Irish bank for a few years. During his tenure at both banks, he was invited to several interviews on Irish television to discuss market turbulence, the factors driving volatility and insights into what could be expected as events unfolded.