French protests escalate and debt concerns add pressure, leading to euro depreciation

⑴ French protests escalated over the weekend, with social unrest raising market concerns about the country's fiscal risks. On Monday, the euro weakened, hitting a 16-month low against the pound and a three-month low against the Swiss franc, while the euro fell 0.3% against the US dollar to 1.1210. ⑵ The yield spread between French and German 10-year government bonds rose to a two-week high, and French bond yields surged. The market is worried about risk contagion, and has begun to focus on the outlook for next year's elections in France and Italy, with expectations of Le Pen being elected rising. ⑶ The market lowered the probability of a European Central Bank rate hike on October 29, with only a 10% chance of a 25bp increase this month; institutional baseline expectations are for a rate hike to 2.75% in December, but the deteriorating situation in France could force the ECB to end its rate hike cycle earlier.