Euro 'continues to lag' as French budget uncertainty keeps political risk elevated

Matthew Ryan, CFA Ebury

The euro continues to lag most major currencies as the political risk premium in France looks unlikely to fade any time soon. The 10-year OAT yield tested 5% again on Tuesday, before retreating.

It remains unclear whether the 2027 budget will clear parliament, and even if it does, it seems set to be so riddled with concessions to both the left and the right that the deficit problem is left insufficiently addressed.

Combined with the jump in European natural gas prices, which have broken above €90/MWh for the first time since December 2022, and it is perhaps a surprise to see EUR/USD hold up as well as it has done.

We have speeches from ECB officials in the next couple of days, including from President Lagarde later today. The October Governing Council meeting looks destined to deliver a hold, so we don’t expect any direct guidance on rates, though the tone of Lagarde’s remarks could guide investors as to the path for rates in December and beyond.

Friday’s preliminary PMI figures for October will also be closely watched, with economists bracing for a modest slowdown.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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