**What Surging UK and French Bond Yields Tell Me: Implications for Forex Markets**
**By The Expat Portfolio (Original Author)
Article Sourced from Seeking Alpha**
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Recent weeks have witnessed mounting volatility in the European sovereign bond markets, particularly with yields surging sharply in both the United Kingdom and France. Although much attention has fixated on the Bank of England’s policies and the political turbulence in France, the implications for currency markets are significant and often underappreciated. This article, building on the analysis by The Expat Portfolio on Seeking Alpha, will explore what these bond market moves signal about future central bank action, investor sentiment, and, crucially, the possible trajectories for the British pound (GBP), the euro (EUR), and their major forex pairs.
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### Yields on the Rise: Background and Market Drivers
Over the early summer of 2024, UK and French government bond yields have moved decisively higher.
– **UK 10-year gilt yields** have risen above 4.3 percent, their highest levels since 2023, reflecting a souring mood among investors regarding the Bank of England’s ability to slash interest rates amid sticky inflation and fiscal uncertainty.
– **French OAT (Obligations Assimilables du Trésor) yields** surged to nearly 3.3 percent, a notable spread over similar-maturity German bunds, as markets digest sudden political risks from snap parliamentary elections and increased anxiety about France’s public finances.
These moves must be seen in the context of:
– A broader selloff in global government bonds, particularly those in G7 economies.
– Rising perceptions of inflation risk and public debt sustainability, especially within countries running persistent fiscal deficits.
– A deceleration or even reversal in expectations that central banks such as the Bank of England or the European Central Bank would soon embark on major rate-cutting cycles.
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### Market Analysis: Why Are Yields Surging Now?
#### 1. Missed Disinflation Targets
– The **Bank of England’s struggles** to rein in core inflation, especially services inflation, have led traders to fade bets on imminent rate cuts.
– Latest UK inflation data showed annualized rates above the BoE’s 2 percent target, casting doubt on a dovish policy pivot anytime soon.
– Similarly, the **ECB faces pressures** as certain Eurozone economies, notably France, contend with ongoing above-target inflation and fiscal looseness in an uncertain political climate.
#### 2. Political Risk Premiums
– French bond spreads over German bunds widened sharply as the **snap parliamentary election** called by President Macron heightened fears that far-right or leftist parties might take the reins, possibly endangering fiscal discipline.
– Market participants now price in a greater risk premium for lending to France, whose public debt is above 110 percent of GDP.
#### 3. Fiscal Sustainability Concerns
– Both the **UK and France** have seen their public finances deteriorate relative to many of their peers, with the UK government’s debt-to-GDP ratio also rising toward and above 100 percent.
– Investors grow wary of countries that appear unable to commit credibly to medium-term fiscal consolidation, especially if growth disappoints.
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### How Forex Markets Are Responding
The confluence of higher yields and risk aversion has sparked significant forex market moves.
#### GBP: Bank of England’s Dilemma and the Pound
– Gilt yields have historically attracted foreign capital, lending support to the pound.
– However, when yields spike due to fears of runaway inflation or fiscal instability, this ceases to be sterling-positive.
– The market is now caught in a crossfire:
– If the BoE *does not* cut rates, the pound is supported by yield differentials but at the risk of stalling domestic growth.
– If the BoE *does* cut rates, especially while inflation remains above target, the pound risks a sharp selloff as
Read more on GBP/USD trading.