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Pound to euro exchange rate crosses 1.15.
The euro is under pressure and could fall further over coming days on concerns about France's bond markets amidst the ongoing political crisis.
France is proving ungovernable: Michel Barnier resigned as Prime Minister in December 2024, Francois Bayroux in September and Sébastien Lecornu on Monday.
Markets were relatively unmoved by the Bayroux resignation, but that his successor lasted just a month provided a jolt and signalled the current French body politic is unable to fix the country's financial problems.
"Lecornu resigned after a meagre 27 days. That torpedoed progress made on the budget and increases the risk Macron will be forced to call fresh legislative elections to bridge the impasse (and a potential Rassemblement National government). Both events have unsurprisingly increased fiscal angst, leading to a renewed rise in domestic bond yields," says Sam Hill, Head of Market Insights at Lloyds Bank.
Concerns about France's debt trajectory were evident in a selloff in government debt, which resulted in the yields of these French government bonds surging on Monday.
"Lecomu’s resignation confirms that French bonds remain uninvestable," says Mathieu Savary, BCA Research’s Chief Strategist of Developed Markets ex-US.
"As long as there’s no majority in parliament, no one will be able to tackle France’s debt and fiscal problems. The problem is that dealing with this issue will most likely demand a full-blown crisis in the OAT market to discipline French politicians," he warns.
As French bonds fall in value, their yield rises, and analysts are monitoring how much faster they are rising against peers to understand just what kind of premium investors are placing on French assets.
The gap, or spread, between French and German bond yields widened sharply on Monday, confirming investor concerns are rising about France's outlook.
Above: French 30-year bond yields rose faster than those of Germany (blue) and Italy (green).
These concerns are reflected in currency markets, where euro exchange rates are losing value.
"The renewed government crisis in France has contributed to a widening of risk spreads. The euro also came under pressure," says Ralf Umlauf, an economist at Helaba Bank.
The pound to euro exchange rate rose to a high of 1.1523 on the day, giving a euro to pound conversion of 0.8678. The euro has since pared some of those losses, hinting at the potential for some stabilisation on Tuesday.
Above: GBP/EUR rises on Monday, pares some gains on Tuesday.
However, the euro could struggle to fully recover given persistent risks.
When Bayroux was ousted by the National Assembley on September 08, French bond yields actually fell, reflecting the global fall in bond yields and confirming very limited concerns about France being a problem for the eurozone.
At the time, the overwhelming narrative was that France's internal problems were ultimately resolvable and that the European Central Bank would ultimately prevent contagion from France to other Eurozone countries.
This ECB backstop remains in place and will prevent a Eurozone-wide crisis, but markets are telling us that Lecomu's resignation is a problem as the bloc's second-biggest country is in a seemingly intractable impasse.
Nervousness should keep the euro under pressure until we get some clarity about how it might be resolved.