French Fears Drag EUR Lower, Pound to Euro Rate Surges to 10-Day Best

December 3, 2024 - Written by David Woodsmith

STORY LINK French Fears Drag EUR Lower, Pound to Euro Rate Surges to 10-Day Best

Fears over the French economic and political backdrop have triggered renewed Euro selling on Monday with the Pound to Euro (GBP/EUR) exchange rate surging to 10-day highs around 1.2085.

According to ING; “Unless inflation expectations drop sharply this week (not consensus), GBP rates being traded like USD rates should mean that EUR/GBP stays offered. Look for EUR/GBP to test its recent low at 0.8260.” (GBP/EUR test of 1.2110.)

French politics will be a key focus this week as the 2025 budget row has escalated with a potential no confidence vote this week and possibility that the government will collapse.

National Rally President Jordan Bardella has stated that the party will activate the censure motion unless there is a last-minute miracle.

Over the weekend, Finance Minister Antoine Armand stated that “the French government doesn’t take ultimatums” and “we won’t be blackmailed”.

ING commented; “Our team had thought that Le Pen may not want to bring down the government and be blamed for a French financial and economic crisis. Yet it looks like the pressure may stay on the euro with a potential no-confidence vote coming on Wednesday.”

According to MUFG, there are currency risks; “While political uncertainty in France has had limited impact on the euro so far, the collapse of the French government does pose a downside risk heading into year end.”

The Euro is also vulnerable on economic grounds with further weak data.

The final Euro-Zone PMI manufacturing index was reported at a 2-month low of 45.2, unchanged from the flash reading and compared with 46.0 the previous month.

Output prices declined at the fastest rate since April.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said: “These numbers look terrible. It's like the eurozone’s manufacturing recession is never going to end. As new orders fell fast and at an accelerated pace, there’s no sign of a recovery anytime soon. He added; “This slump is likely going to drag into next year.”

There will be further speculation over the December 12th ECB policy decision.

MUFG commented; “We still believe that the ECB will stick to a 25bps cut in December but could become more open to a larger cut in Q1.”

The UK PMI manufacturing index was revised down to 48.0 in the final November reading from the flash reading of 48.6 and the lowest reading for 9 months.

Rob Dobson, Director at S&P Global Market Intelligence commented; “With recent budget announcements on labour costs and employer national insurance likely to raise costs further in 2025, and geopolitical tensions heating up notably around the threat of increased global protectionism, manufacturers are left facing an environment of high costs, low demand and raised uncertainty for the foreseeable future.”

The Pound will be vulnerable if there is increased speculation that the Bank of England (BoE) will be more aggressive in cutting interest rates due to economic fears.

Sterling can, however, be resilient if the BoE maintains a cautious stance.

ING commented; “the BoE view seems to be that late-cycle inflation risk means that the Bank has to be gradual with its easing cycle.”

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TAGS: Pound Euro Forecasts