The euro's movements and the reaction of French bonds will be in focus in today's London session. Fitch lowered France's rating outlook to Negative, prompting a reassessment of fiscal risks in Europe.
Fitch affirmed France's long-term rating at A+ while lowering its outlook from Stable to Negative. The agency cited delays in deficit reduction, a 0.1% quarter-on-quarter contraction in real GDP in the July-September quarter, rising interest expenses and parliamentary divisions. It expects government debt as a percentage of GDP to continue increasing.
EUR/USD's reaction today has so far remained limited. French 10-year bond yields rose above 5.14% on 22 October, but traded below 5% last week. Some market participants believe that the outlook change alone does not alter the entire picture and that the negative news has already been priced in to some extent. However, selling pressure could intensify after European market participants enter the market, and a renewed widening of the German-French yield spread could weigh on the euro.
More broadly, France's wave of protests shows no sign of abating. Around 320,000 people took part in demonstrations nationwide on the 31st, and more than 770 people were detained. In Germany, protests led mainly by young people also escalated into clashes with police. The protests are calling for investment in education and housing, but could dampen consumer sentiment across the region.
In the UK, trading has been subdued ahead of the Bank of England's policy rate announcement on the 5th. Markets are increasingly expecting rates to rise from 3.75% to 4.00%. UK CPI rose 3.5% year on year in September, exceeding the BOE's forecast, leaving the split in the vote and the bank's future policy stance as the key focus.