Euro Slumps as French-German Bond Gap Widens Amid Inflation Concerns

The Euro has experienced significant selling pressure as the French-German bond gap widens. France's budget freeze on public-sector pay and most pensions is expected to limit its deficit to 5% of GDP, but the country has been running above this threshold in recent years. The European Central Bank (ECB) raised its deposit rate to 2.50% on September 10, with markets anticipating further increases due to inflation above 3%. This will increase France's costs for new debt.

The ECB's bond-buying backstop is reserved for selling deemed unwarranted and disorderly, and a widening premium on published deficits may not qualify as either. The euro area's flash Harmonized Index of Consumer Prices (HICP) for September is due to be released on Friday at 09:00 GMT, with a forecasted increase to 3.6% YoY from 3.2%. ECB Executive Board member Cipollone will speak before the release, while Vice-President Vujčić will follow afterwards.

A hot reading could raise the odds of an ECB hike on October 29 and increase the cost for France. The recent economic data has shown that Germany, France, Italy, and Spain all reported higher-than-expected September figures.