French risks spread across Eurozone as euro lags

• 177.45 in focus as EUR/JPY slips on French political risks spreading across euro-area nations.
• No change in policy rates is expected from the ECB at its October policy meeting.
• The BoJ’s Governor Ueda reaffirms the central bank’s commitment to a gradual pace of monetary tightening.

EUR/JPY is down 0.13% at around 177.45. During Wednesday’s European session, the Euro (EUR) lags its major currency peers, including the Japanese Yen (JPY).

Selling pressure on the Euro persists. Market experts argue that the fallout from France’s political crisis is already extending across the Eurozone.

French political turmoil spreads bond stress and pressures Euro

European markets have felt the spillover from the latest French political turmoil, according to Deutsche Bank analysts. They note that “those market concerns around French debt cascaded across other countries and asset classes too.” On sovereign debt, they report that “the Italian 10yr spread over bunds was also up +4.7bps on the day to 111bps, whilst Spain’s was up +1.2bps to 62bps.” The sell-off also reached equities: “the STOXX Banks index (-2.07%)” fell to a four-month low, alongside “even bigger declines for the French banks, including Société Générale (-3.41%), Crédit Agricole (-2.64%) and BNP Paribas (-2.48%).” Turning to currencies, Deutsche Bank says that “all that caused fresh pressure for the Euro itself, which weakened -0.23% against the US Dollar to close at $1.1213.”

Funding conditions have tightened rapidly, Rabobank’s RaboResearch team indicates. It describes the fixed-income response as “an ugly bond reaction to the ugly protests and looting in France (and Belgium and Italy, following earlier peaceful protests in Spain and Portugal) with 10-year French yields +13bps, Italian +8bps, and German +3bps.” The team emphasises that “even if we only focus on fiscal metrics, French 10-year borrowing costs are now half a rate hike higher than Friday,” illustrating the speed of the adjustment.

For policymakers, Rabobank identifies “the hypothetical whispered realpolitik binary” ahead as a choice “between the ECB bailing France out if needed, at a cost to the Euro and the fury of Germany, and not doing so at a cost to EU economic, political, and market stability.” It poses a further question: “Could the ECB bail everybody else out from French contagion and leave Paris to sort out its mess?” Rabobank’s conclusion in this setting is that “whatever happens now, more volatility seems far more likely than a ‘reversion to mean’.”

For the policy meeting later this month, market experts expect no interest-rate change from the European Central Bank (ECB).

2.50% deposit rate: Danske Bank reaffirms ECB hold forecast

An unchanged ECB rate setting remains appropriate, in the view of analysts at Danske Bank’s Danske Research Team. They say they “published a new ECB call yesterday,” reaffirming their forecast that the central bank will “keep policy rates unchanged on Thursday 29 October, with the deposit rate at 2.50%, in line with consensus and market pricing.” Their assessment points to the ECB retaining its current rate configuration at the forthcoming meeting.

With Bank of Japan (BoJ) Governor Kazuo Ueda reaffirming gradual policy normalisation, the Japanese Yen is advancing against its currency peers apart from the Australian Dollar (AUD).

7/10 Ueda speech signals cautious hawkish tilt as Japan’s inflation loop strengthens

FXS Speechtracker assigns the speech a score of 7/10, just below BoJ Governor Ueda’s historical baseline of 7.4/10. A mildly hawkish bias nevertheless emerges from his focus on “underlying inflation near 2%” and a positive wages–prices loop. Ueda points to both demand-led and supply-driven inflation, labour-market tightness and the likelihood that long-term rates would rise steadily if the short-term policy rate were increased. His comments suggest greater confidence in gradual policy normalisation while financial conditions remain accommodative.

On bonds, Ueda maintains that the fundamental tapering approach is unchanged and declines to announce emergency JGB measures in advance. This reinforces his cautious approach to market intervention. He conveys that carefully calibrated policy is necessary to anchor core inflation near 2% and stabilise the JGB market. That message supports the view that expectations of a gradual but sustained retreat from ultra-easy policy could strengthen the Yen, while the BoJ continues to depend on incoming data and monitor market instability closely.