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

Political unrest in France has intensified over the weekend, as concerns mount over the country's political situation ahead of the upcoming presidential election. The government has blamed far-left activists for the growing unrest, while student protests have further fueled worries about the stability of the political landscape.

Meanwhile, the British pound has strengthened against the euro, despite the euro showing signs of weakness. This move can be attributed to broader concerns in the eurozone, rather than a resurgence in confidence in the pound.

In the coming week, central bank speakers will play a crucial role in shaping market sentiment. Bank of England officials, including the Governor, Chief Economist, and several other members of the Monetary Policy Committee, are set to address various seminars and conferences. The discussions are likely to focus on potential interest rate increases, given the persistent inflation pressures.

Meanwhile, developments in the Middle East, US monetary policy discussions, and key economic data from Mexico and Canada will provide further direction for currency markets. However, political developments in France continue to dominate economic considerations, with risks still skewed towards further weakness in the euro. The pound, on the other hand, has shown strength against the euro, but this can be attributed to euro weakness rather than pound strength.

In the Middle East, the Houthis have intensified their efforts to gain control over Yemen, while the Yemeni government continues to receive support from Saudi Arabia. The Houthis have claimed responsibility for attacks on facilities in Riyadh, although Saudi Arabia denies these allegations. Additionally, the US has withdrawn bombers from RAF Fairford, following an incident involving the detention of vans carrying petrol near the base.

The US non-farm payrolls report for September weakened the case for further interest rate hikes from the Federal Reserve. However, labor market data has been inconsistent, with payrolls fluctuating between strength and weakness on a month-to-month basis. The focus this week will shift towards the minutes from the latest Fed meeting, which may provide greater insight into the policy debate. Several Federal Reserve officials are also scheduled to speak throughout the week.

Looking ahead, the US mid-term elections are gaining momentum, with potential implications for President remarks and voter support. For US financial markets, risks remain tilted towards the upside for yields. As for the US dollar, questions about the strength of the US economy and the sustainability of growth persist. Upcoming releases from Mexico and Canada may offer clues about the recent underperformance of the peso and Canadian dollar against the US dollar, but their impact remains uncertain.