Political developments around the world are converging this week, affecting the outlook of several currencies. The Prime Minister of Japan resigned over the weekend, a cabinet reshuffle took place in the UK, and France’s Prime Minister faces a no-confidence vote on Monday. A common theme in these events is government spending levels. That includes a surprise downgrade in Poland’s sovereign rating on Friday, which left Forex markets concerned about the fiscal health in the CEE.
Markets typically detest political spillover, as predicting what politicians will do or how voters will react generates a heightened amount of uncertainty. Given the surprising nature of most of these events, markets have naturally turned towards safe havens at the start of the week, giving the dollar a bit of a boost despite Friday’s disappointing NFP.
French Confidence Vote May Weigh On the Euro
Two weeks ago, French Prime Minister Francois Bayrou called for a no-confidence vote in his own government to break the gridlock over budget cuts. By all appearances, he’s set to lose that vote, which will likely come on Monday after extensive debate in the National Assembly. If he unexpectedly wins, that could support the Euro.
The potential of a loss is what has markets nervous: French President Emmanuel Macron would have to appoint a new Prime Minister, the seventh of his Presidency. The fractous make up of the General Assembly means that it will be difficult to form a new government, which could just end up in the same place as the current one. A representative of the center-left is the favored option for the moment, which would likely reinstate the budgetary gridlock and threaten the stability of the nation’s financial outlook.
Japanese Prime Minister Resings, Dovish Candidates Await
The Prime Minister of Japan Shingeru Ishiba announced his resignation and called for party elections on October 4 to find his replacement. The move was widely anticipated, given his increasing political isolation and following his party’s loss in the upper house two months ago. The yield curve steepened as a sign that traders were a little more worried about Japan’s financial stability.
The LDP party will hold a leadership contest in which all of its members can vote. One of the leading candidates to replace Ishiba is Sanae Takaichi, who is known for her support of fiscal expansion and slower interest rate normalization. If she were to win the premiership, it’s largely understood that the BOJ might be much slower to raise rates, which would likely drag on the currency. On the other hand, her more hawkish foreign policy might put the recent trade deal with the US under question.
Another UK Cabinet Reshuffle
UK Prime Minister Kier Starmer was forced to reorganize his cabinet for the second time in as many weeks on Friday. Deputy Prime Minister Angela Rayner stepped down after failing to pay enough tax on her home, and replaced by Defense Secretary David Lammy. The Labour Party will now hold an election to select a deputy leader, amid growing resentment in the base against Starmer, who is underperforming in the polls.
The pound was largely steady after the weekend, as it became apparent that the Chancellor Rachel Reeves was unaffected. But the uptick in gilts suggests that traders are worried about the persistent political issues in the UK, which could keep cable from gaining headway.
