EUR: French political uncertainty is on the rise acting as a dampener on Euro - MUFG

One of the main developments at the start of this week has been the announcement from French Prime Minister Francois Bayrou that he has agreed with President Emmanuel Macron to call parliament back into session early in order to allow the government to present its budget plan and hold a confidence motion. Prime Minister Francois Bayrou noted that 'yes it's a risk, but the supreme risk is doing nothing...there's no getting out of this situation if we are not brave', MUFG's FX analyst Lee Hardman reports.

French political uncertainty may not be sufficient to lower EUR/USD

"The government is facing pushback against their plans for EUR44 billion of spending cuts and tax rises including abolishing two of France's public holidays. The far-left France Unbowed party, the Green party and the far-right National Rally have all said they will vote to overturn the government while the Socialist party have said they won't support a vote of confidence. According to Bloomberg, should the parties that have announced their opposition to supporting a confidence motion follow through with votes against it on 8th September that would be sufficient for force Prime Minister Bayrou to submit his government's resignation."

"The unfavourable domestic political developments could put a dampener on investor sentiment towards the euro in the near-term. The negative impact is already more evident in the French government bond market where the 10-year yield spread for French over German government bonds has re-widened back towards 80bps after trading closer to 65bps in early August. Over the last year the spread peaked out just below 90bps during the previous Budget negotiations in November."

"The euro also weakened during this period falling below 1.0500 although the main driver at the time was the initial fallout from the US Presidential victory for Donald Trump that encouraged a stronger US dollar. On this occasion we are not convinced French political uncertainty will be sufficient on its own to lower EUR/USD if the US dollar is weakening in response to Fed policy easing and the threat to the Fed's independence."