EUR/GBP remains near a one-month low as political turmoil in
France weighs on investor sentiment, capping the Euro’s attempts at a broader
recovery.
After declining earlier in the day, the Euro (EUR) tries to level off against the British Pound (GBP) on Wednesday. The EUR/GBP cross is currently trading at about 0.8665, which is close to its lowest level since September 16.
While the Pound lost some of its impetus after the Bank of England's (BoE) Financial Policy Committee (FPC) Meeting Minutes were made public, the Euro was able to find support despite the fact that political tensions in France were still high.
Following the resignation of Prime Minister Sébastien Lecornu, which intensified a budget stalemate with President Emmanuel Macron, political unpredictability in France continues to be a barrier for the common currency.
Lecornu stated earlier in the day that he would give his results to President Macron later in the evening and expressed confidence that France will have a budget in place by the end of the year. Fears of a protracted economic stalemate or early elections have subsided as a result of hopes that these negotiations will forward.
Reassurance was provided by statements made by European Central Bank (ECB) officials about monetary policy. Müller, Escrivá, and Nagel, members of the Governing Council, stated that the Eurozone economy is gradually recovering, that inflation is close to the 2 percent target with expectations anchored, and that interest rates are still reasonable.
Following the BoE's Financial Policy Committee minutes, which indicated no changes to the countercyclical capital buffer or the leverage ratio, the pound pared its previous gains. The committee emphasized that the system is susceptible to a severe correction due to stretched equity valuations, particularly in key international markets. Any abrupt repricing of US assets or changes in investor confidence are likely to have an impact on the UK.
In order to get new hints about the outlook for monetary policy, traders will be watching for comments made by ECB President Christine Lagarde later on Wednesday. Huw Pill, the chief economist for the BoE, is expected to make remarks later today. The ECB's Monetary Policy Meeting Accounts, which are due on Thursday, will next come into focus. The UK economic calendar is relatively light this week.
How might French political turmoil affect ECB policy this month?
Political uncertainty in France, particularly the departure
of Prime Ministers and deadlock in parliament, has led to a spike in yields on
French government bonds (OATs) to a level not seen since 2011. Wider spreading
between French bonds and German Bunds is making funding for France more
expensive and is contributing to financial market volatility in the eurozone.
The European Central Bank (ECB) has a tool termed the Transmission Protection Instrument to manage unjustified pressures in the market, such as that occurring to bond markets in large eurozone countries such as France.
However, deploying this may be difficult because France may not strictly meet all of the criteria to qualify for the actions described, although the ECB may also be willing to intervene behind the scenes should instability escalate into a more serious financial crisis affecting the broader eurozone financial system.