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EUR: French politics to drag - ING

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  Published in Politics and Government on Tuesday, September 9th 2025 at 18:02 GMT by FXStreet
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Euro under Pressure as French Political Uncertainty Mounts

On 9 September 2025, FXStreet’s “EUR – French politics to drag” article detailed how a protracted political stalemate in France was exerting downward pressure on the euro. With the French National Assembly already in crisis and President Emmanuel Macron facing mounting calls to dissolve Parliament, the currency had slipped to 1.073 USD—its weakest level in almost two months. The piece offered a thorough breakdown of the factors driving the euro’s recent wobble, the likely scenarios for the coming months, and what traders should watch for.

1. The Political Landscape in France

1.1 Dissolution of Parliament

The article opened by explaining that President Macron had officially dissolved the National Assembly on 3 August 2025, triggering snap elections slated for 12 September (first round) and 26 September (second round). The dissolution followed a failure to pass a critical fiscal reform bill that would have reduced France’s projected 2026 deficit from 4.5 % of GDP to 2.8 %—a key requirement of the EU’s Stability and Growth Pact.

Macron’s decision, the article noted, came amid intense criticism from both sides of the political spectrum. The left‑leaning En Marche! coalition was split, while the far‑right National Rally (N.R.) had gained traction, especially in rural areas. The Socialist Party, long in decline, was now trying to re‑establish itself as a king‑maker.

1.2 Potential Election Outcomes

FXStreet’s analysis highlighted three main election scenarios:

1. Macron Retains Majority – a narrow win would signal policy continuity and a relatively stable euro.
2. En Marche! Down, N.R. Wins – a far‑right victory could prompt significant changes in fiscal policy, potentially breaching EU budget rules and spurring a credit downgrade.
3. Fragmented Parliament – if no party wins an outright majority, France would likely form a coalition government, which could lead to policy uncertainty and volatility in the euro.

The article emphasized that European investors were particularly concerned about scenario 2, as the N.R. has historically opposed EU fiscal rules and could threaten France’s commitment to the Eurozone’s fiscal discipline.

2. Euro Market Reaction

2.1 Currency Movements

The euro’s decline was described as a classic “political risk” move. FXStreet’s chart showed a 2.5 % slide from 1.100 USD in early August to 1.073 USD by mid‑September. The USD/EUR pair had rallied to 0.933, and the USD/JPY pair had strengthened to 135 JPY.

The article pointed out that the euro’s dip was mainly driven by risk‑off sentiment. Investors sold euro‑denominated assets and moved into U.S. Treasuries, which were benefiting from an impending rate hike cycle.

2.2 Impact on Related Asset Classes

Beyond the currency, French political uncertainty had spilled over into bond markets. The 10‑year French OAT (Obligations Assimilables du Trésor) yield had risen from 0.92 % to 1.20 % in the run‑up to the election—an increase that could trigger a sell‑off in euro‑zone sovereign bonds. FXStreet quoted a German analyst noting that the German bund, often viewed as a benchmark, could see its spread widen to 50 bp if France’s political situation deteriorated further.

The article also highlighted that the euro‑zone stock index, the EURO STOXX 50, had slumped 4 % in the week leading to the election announcement, largely because of the perceived risk of a “politically‑disrupted fiscal environment.”

3. Economic and Policy Context

3.1 Euro‑Zone Inflation and ECB Policy

The article set the political discussion against the backdrop of the European Central Bank’s monetary stance. Inflation in the euro‑zone had cooled to 3.1 % year‑on‑year in August, below the ECB’s 2 % target. However, the ECB had signaled that it was unlikely to cut rates in 2026 because of ongoing inflation pressures in some member states, particularly Italy and Spain.

Macron’s potential to push for higher taxes or to cut public spending—both of which could affect consumer confidence—was seen as a counterweight to the ECB’s dovish tone. The article noted that if France were to adopt a more expansionary fiscal stance to support growth, it could create pressure on the ECB to adjust its policy cycle, potentially affecting the euro’s long‑term trajectory.

3.2 EU Fiscal Rules

The article discussed the role of the EU’s fiscal framework in shaping investor sentiment. France’s projected 2026 deficit had already breached the 3 % of GDP threshold that the Stability and Growth Pact requires, prompting scrutiny from the European Commission. A National Rally victory could undermine France’s commitment to fiscal discipline, possibly leading the Commission to impose stricter monitoring or sanctions.

The article quoted a spokesperson from the European Commission who said that the Commission would “remain vigilant about the implementation of the fiscal rules” and that any deviation could prompt “penalties” or a “tighter fiscal surveillance regime.”

4. Forecasts and Trading Implications

4.1 Short‑Term Outlook

FXStreet’s economists offered a balanced view: in the short term, the euro is likely to stay under 1.080 USD until the election results are clear. The article recommended that traders watch the following key data points:

• Election Result Announcement (first round 12 September, second round 26 September).
• French GDP Growth Forecast for 2026, as released by the National Institute of Statistics and Economic Studies (INSEE).
• ECB Monetary Policy Meeting in November, where the bank’s stance on rate cuts or forward guidance would be clarified.

The article stressed that any significant policy shift—such as Macron’s decision to adopt a more aggressive fiscal stimulus—could either support or further weaken the euro depending on how it aligns with ECB expectations.

4.2 Long‑Term Implications

Looking beyond the election, the article emphasized that France’s political direction would influence the euro’s long‑term path. A stable, pro‑EU government would likely foster confidence in the eurozone’s fiscal architecture, supporting a gradual euro appreciation. Conversely, a nationalist or protectionist government could erode confidence, leading to a prolonged euro weakening.

The article concluded that traders should remain cautious but open to opportunistic trades in the euro’s volatility. For instance, a carry trade strategy—borrowing USD at relatively low rates and investing in euro‑denominated assets—might still be attractive if the ECB’s policy easing is perceived as likely.

5. Bottom Line

FXStreet’s article captured a snapshot of a Eurozone currency grappling with political uncertainty. By dissecting the French political crisis, its possible outcomes, and their ripple effects on the euro and related markets, the piece offered readers a nuanced perspective on why the euro was trading lower than it had in August.

For investors and traders, the take‑away is clear: the political developments in France are not merely domestic news; they are a vital barometer for euro‑zone economic stability and a key determinant of the euro’s short‑term and medium‑term trajectory. Keeping an eye on election results, fiscal policy announcements, and ECB communications will be essential for navigating the euro market in the coming weeks.