The new week opened with Europe setting the tone. Protests across France over the weekend sharpened doubts about whether Prime Minister Lecornu's minority government can pass a 2027 budget that brings the deficit down. French government bonds sold off, the CAC 40 fell, and EUR/USD slipped roughly 0.2% to trade in the low 1.12s. The dollar index edged back toward 102 as a result, but it was a story about euro weakness more than dollar strength. Sterling was dragged a little lower with it and held near 1.33, waiting on a busy week of UK data.
Elsewhere the dollar was mixed. USD/CAD dropped toward 1.41 after Canadian September CPI rose to 3.1% year on year, below the 3.2% forecast, as gasoline did most of the work while core measures eased. AUD/USD rose about half a percent toward 0.70, helped by Chinese third-quarter growth of 4.5%, slightly above expectations, and by hawkish comments from the Reserve Bank of Australia. USD/JPY went the other way and pushed above 158 as long-dated Treasury yields climbed again, with the 10-year back above 5.1%. That move came even though Bank of Japan Governor Ueda said underlying inflation is close to target. Gold changed little, holding in the $4,100s, while Brent swung around but stayed well above $100.
The deeper point: when the spread matters more than the policy rate. FX traders usually look at rate differentials between central banks, and the ECB did nothing new today. What moved the euro was a different kind of gap: the extra yield investors want to hold French debt rather than German debt. That spread is near its widest since the euro-zone debt crisis of the early 2010s. When it widens, the market is pricing fiscal and political risk inside the currency union. Rising French yields are a warning sign, not a reason for foreign money to buy euros. That is why the euro can weaken even as some euro-zone yields go up. Keep the cause in mind when you read the move: a selloff driven by sovereign risk can reverse quickly on a political headline, while a selloff driven by rates tends to follow the central-bank calendar.
What's on deck next session:
- UK labour market report. Unemployment is expected to edge up toward 5%, with wage growth slowing. It sets up Wednesday's UK CPI.
- People's Bank of China loan prime rate fixing.
- US housing starts. The Fed is in its blackout period ahead of the October 27-28 meeting, so no Fed speakers will be there to cushion the data.
- Any news from Paris on budget talks or the planned November 5 national strike.
Thin calendars plus political headlines can mean sudden gaps in liquidity. Size positions with that in mind.