Antje Praefcke at Commerzbank highlights that political and rating risks in France, plus cautious European Central Bank (ECB) expectations, weigh on the Euro (EUR) but are largely priced in. Markets now see an ECB hike in December and more tightening next year, which may be revised lower. She anticipates relatively stable EUR/USD into next week, with downside risk if French protests escalate and curfews prove ineffective.

France and ECB shape Euro outlook

“The situation in France is an underlying factor weighing on the euro. More protests are expected this weekend. Moody’s could also be the last rating agency to downgrade France on Friday. And the ECB is unlikely to deliver a hawkish surprise next week. The market is no longer pricing in a rate hike for October, but is pricing in one for December and slightly more than one additional hike by the middle of next year. Here, too, the market may have to adjust its expectations should the ECB sound cautious regarding the future interest rate path, which would put the euro under downward pressure.”

“In general, however, I think a great deal of negative news is already priced into the euro, particularly with regard to France; at the same time, the euro zone purchasing managers’ indices are likely to remain stable on Friday, so based on the current news landscape, I expect little new downward pressure on the euro. On the other hand, of course, a resolution to France’s debt problem or a credible budget proposal is unlikely, so there is also no reason to bet heavily on a recovery of the euro.”

“At least for the coming days leading up to the central bank meetings in the middle of next week, I expect relatively stable EUR/USD rates, as there are no compelling reasons to favor one currency over the other. After all, everyone has their own cross to bear. Nevertheless, I see a slightly higher risk that the euro could see a short dip again if protests in France escalate, especially if the curfews imposed fail to have the desired effect.”