MORE ECB'S LAGARDE: AVERAGE SOVEREIGN BOND YIELD HAS RISEN 35BP SINCE THE CUT-OFF POINT FOR SEPTEMBER PROJECTIONS, PROVIDING SOME RESTRICTION

ECB President Christine Lagarde stated that the average euro-area sovereign bond yield has risen by 35 basis points since the cut-off point used for the September staff projections, and that this increase is providing some degree of monetary restriction. The mechanism at work is tighter financing conditions transmitted through the government bond curve: higher sovereign yields lift the benchmark for corporate borrowing costs and mortgage rates across the currency bloc, effectively doing part of the ECB's tightening work without further policy rate moves. The euro is exposed through rate-differential channels, since a relatively hawkish-sounding ECB narrative supports the currency against lower-yielding peers, while the DAX and CAC 40 are sensitive to the discount-rate effect of higher yields on equity valuations and to the pressure on rate-sensitive sectors such as construction, real estate, and banks' funding costs. Traders will focus on the next euro-area flash HICP inflation print and the subsequent ECB policy meeting, where the central bank will need to judge whether the market-driven tightening has already done enough to justify holding rates steady.

The Euro (EUR) is the currency of 20 European Union member states. Major EUR movers include ECB Governing Council decisions, Eurozone CPI prints, Bund/BTP spread events, and political risk from France, Germany and Italy.

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