Above: File image of Emmanuel Macron, President of France. Copyright: European Union.
The Euro remains under pressure against the British Pound ahead of a no-confidence vote in France's Prime Minister Michel Barnier.
Lawmakers in Paris will begin debating the motions at 4 p.m. in Paris Wednesday, with the voting to start shortly thereafter.
Barnier is expected to lose the vote, with the RN party of Marine Le Pen vowing to join forces with the leftist bloc and oust Barnier.
The move comes after Barnier used a constitutional clause to force through his budget that aims to repair France's finances.
If Barnier loses, he will tender his resignation to President Emmanuel Macron, ushering in a new period of political uncertainty in Europe's second-largest economy.
"Imminent political turmoil and concerns about delays to fiscal consolidation can further drive up the French‑German bond spread and weigh on EUR/USD in our view," says analyst Kristina Clifton at Commonwealth Bank.
Ahead of the vote, EUR/USD is at 1.0516. The EUR/GBP exchange rate is at 0.8287, and the GBP/EUR is near 2024 highs at 1.2064.
Speaking to the press on Tuesday, Barnier held out hope that he could survive the vote.
"I think it's possible there will be a reflex of responsibility," Barnier said on French TV. "I think that the country's higher interest, the common good, the national interest, mean something."
If Barnier were to win, somehow, euro exchange rates would stage a recovery.
However, with the RN party having committed to voting him out, Barnier looks set to be the shortest-serving Prime Minister of the Fifth Republic.
The existing government would remain in place in a caretaker capacity after Barnier's resignation, overseeing basic spending and taxation functions to keep the state moving.
Macron will have to appoint a new government, but there is no deadline for him to do so, and the chances of a new prime minister commanding the majority required to push through legislation to course-correct the country's finances are slim.
This means there is the potential for France to be governed by a caretaker administration until July when legislative elections can next be held.
Macron might prefer this route as it could enforce the necessary fiscal discipline that France so desperately needs.
Current finance minister Antoine Armand, said on Tuesday that stopgap legislation would raise taxes for millions of households and block planned spending increases for some priorities, including security and farming.
For his part, Macron says he intends to see through his term, which ends in 2027.
Without fiscal consolidation, France's debt would continue to spiral and is expected to reach 7% of GDP next year, well above what the EU allows.
In response, French debt costs (bond yields) have shot higher as investors seek extra compensation for holding it.
"It's hard to find any positives on the EU in the upcoming year with the political mess, de-industrialization, elevated energy prices and just general lack of solutions or leadership there," says W. Brad Bechtel, Global Head of FX at Jefferies LLC.
Why the Euro Could Soon Recover
However, France's debt costs have yet to rise to crisis levels, and they can come down once Barnier is removed and the caretaker government settles into its role.
"The market is not willing to push French bonds to breaking point at this stage," says Kathleen Brooks, research director at XTB.
Meanwhile, Eurozone countries are privileged in that the mighty European Central Bank (ECB) will always act as a backstop to ensure an unruly deterioration in any given country's debt.
TS Lombard analyst Davide Oneglia says France extracts an "exorbitant privilege" from being a member of the Eurozone.
"The ECB has come a long way since the GFC: now it has the tools (TPI), the template (UK Gilt crisis) and the motive (protect repo markets) to stem a market rout," he says.
This is perhaps why the Euro hasn't fallen to fresh lows against either the Dollar or Pound on the back of recent developments.
It also means that the Euro can recover once 'peak pessimism' passes.