French Political Risk and the Euro By

3 Min Read — The French government bond market experienced significant stress after the European elections this weekend, with the 10-year OAT-Bund spread widening sharply by 7-8 basis points to reach the highest level since last year. The pressure on the bond market is not surprising after Standard & Poor’s recently downgraded French government bonds from AA to AA- due to budgetary concerns. The downgrade was influenced by last year’s larger-than-expected fiscal deficit of 5.5% of GDP, which was attributed to weak growth and weak revenues.

Macron’s government was already struggling with fiscal consolidation, and the worry now is that any National Rally (RN) administration will take a Trump-like approach to fiscal consolidation – with the aim of boosting growth as a means to tackle fiscal problems.

ING economists expect the European Commission to launch its excessive deficit procedure against France on June 19, which could have significant consequences for the euro. The next French government’s response to this procedure will be crucial. With the latest opinion polls showing that Marine Le Pen’s RN party could win the largest vote share in the upcoming elections on June 30 and July 7, but fall short of an outright majority, the focus is likely to shift to the potential coalitions and their policy. implications.

In the current environment, the euro is expected to struggle to recover, with forecasts suggesting it will continue to hover around 1.07/08, subject to downside risks. Today’s focus will be on speakers from the Eurozone, including Philip Lane, Chief Economist of the European Central Bank, who will speak at 1:05 PM CET. Despite the ECB’s reluctance to implement further easing measures, with a further 31 basis points of easing already priced in for this year, the central bank could take a strong stance in the short term to counter the potential impact of the weakening euro on the disinflation process. soften.

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The exchange rate now faces strong resistance at the 1.0800 level, reflecting the market’s reaction to the confluence of political and fiscal uncertainties in France.

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