French Political Uncertainty, UK Tariffs and US Rate Expectations: Sterling Update

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Political uncertainty in France continues to weigh on the euro, with unrest intensifying over the weekend as concerns grow around the country’s political backdrop and ongoing budget difficulties.

The French government has attributed the growing unrest to far-left activists, while the student protests have added to concerns around the stability of the political situation ahead of the Presidential election.

Meanwhile, sterling has strengthened against the euro, with GBP/EUR moving through €1.18, although this appears to be more a reflection of euro weakness than renewed confidence in the pound. With a busy week of central bank speakers ahead, including several from the Bank of England, markets will be watching closely for any signals on the future path of interest rates.

Elsewhere, developments in the Middle East, the latest US monetary policy discussions and key economic data from Mexico and Canada will provide further direction for currency markets. In my view, political developments remain the dominant theme for the euro, with risks still skewed towards further weakness.

EUR weakness continues as political developments in France remain in focus

Conflict across France continued over the weekend, intensifying financial market concerns around the political backdrop ahead of the upcoming Presidential election, as well as ongoing issues surrounding the French budget. The French government has attributed the growing unrest to far‑left activists, arguing that they are using the student protests to advance their own objectives.

Meanwhile, German Chancellor Merz was in Kyiv over the weekend when a Russian drone strike targeted a bridge in the Ukrainian capital. In Spain, the government could be preparing to call an early election. Prime Minister Sánchez remains embroiled in a scandal, with his wife at the centre of allegations relating to embezzlement, corruption, misappropriation of funds and influence peddling.

In short, political developments currently dominate economic considerations, something that could continue to undermine the euro against the US dollar. Risks also remain skewed towards weakness against other currencies.

UK expected to impose EV tariffs on China, BOE speakers in focus this week

The pound weakened into the end of last week against the US dollar but reached multi‑week highs against the euro, both of which appear to have little to do with the UK’s domestic backdrop.

Weekend speculation suggests the UK is set to impose electric vehicle tariffs on Chinese manufacturers, which have come to dominate the UK fleet EV market in recent quarters. Such a move would bring the UK more closely into line with the European Union and could offer limited support to the domestic automotive sector, where production is projected to fall to multi‑decade lows.

Bank of England speakers are in abundance this week. The Governor, Chief Economist and several other MPC members are all scheduled to address seminars and conferences. Catherine Mann speaks first tomorrow morning, followed by Greene, Pill, Bailey and Lombardelli. Will they hint at interest rate increases? Given the inflation pressures seen recently, that would appear to be a logical line of discussion.

GBPEUR’s move through €1.18 could shake the tree for those positioned for further euro weakness. However, this remains a story of euro weakness rather than pound strength. Should UK‑specific problems emerge, which remains a material risk, this rally could reverse quickly and sharply, in my view.

Middle East focus shifts to Yemen as US withdraws bombers from RAF Fairford

Market attention in the Middle East has shifted away from the direct confrontation between the US and Iran and towards efforts by the Houthis to gain greater control of Yemen, alongside attempts by the Yemeni government to repel those advances. The Yemeni government continues to receive support from Saudi Arabia, and efforts to defend key cities intensified over the weekend.

The Houthis could disrupt key Red Sea shipping routes and have claimed responsibility for attacks on facilities in Riyadh, a claim disputed by Saudi Arabia. Saudi authorities have reportedly cut prices to Asia in an attempt to gain market share from competing suppliers and, together with the UAE, have announced plans to build a crude oil stockpile in Asia.

Meanwhile, the US withdrew all bombers from RAF Fairford in Gloucestershire following the recent incident in which authorities detained several vans carrying petrol near the base.

The overall news flow is unlikely to trigger a significant decline in oil prices, but it may limit the scope for renewed increases, in my view.

Fed minutes and speakers become the focus after payrolls

September’s US non‑farm payrolls report, released at the end of last week, weakened the case for the Federal Reserve to deliver another interest rate increase at its upcoming meeting. However, softer labour market data has not been a consistent trend, with payroll outcomes continuing to swing between strength and weakness on a month‑to‑month basis.

The focus this week shifts away from economic data. Markets will receive the minutes from the latest Fed meeting, which could provide greater insight into the strength of the policy debate. Several Federal Reserve officials are also scheduled to speak throughout the week.

Meanwhile, the US mid‑term election race continues to gather momentum. Will this result in further off‑the‑cuff remarks from the President as he tours Republican heartlands in an effort to strengthen voter support?

For US financial markets, risks remain skewed to the upside for yields. As for the US dollar, questions around the strength of the US economy and the sustainability of growth remain present, in my view.

Could Mexican inflation and Canadian jobs data turn the tide against the USD?

A pair of important releases from Mexico and Canada could command attention this week, but whether they will prove sufficient to reverse the recent underperformance of the peso and Canadian dollar against the US dollar remains unclear.

Mexico releases September CPI inflation data on Thursday. Markets expect the figures to show an increase in headline inflation alongside a decline in core inflation, a combination that could confuse rather than clarify the outlook for monetary policy. The most likely implication is that Banxico leaves interest rates unchanged at its next meeting. Meanwhile, September vehicle production and export figures could disappoint again, which would strengthen the argument for lower interest rates, in my view. These releases are unlikely to alter the broader direction of the peso, meaning markets may once again look to developments in the US for support.

Canada, meanwhile, publishes September labour market data. The figures are expected to show further weakness, with subdued global growth and strained trading relations with the US continuing to suppress hiring intentions. Unless there is an upside surprise, I suspect the Canadian dollar will struggle to recover meaningful ground based on domestic factors alone.