Pound Sterling and Dollar Fall Against Euro as French Visibility Improves


File image of Emmanuel Macron. Copyright: European Union.


The Euro gained after markets saw a path forward for France following the resignation of Prime Minister Michel Barnier's government.

The Pound to Euro exchange rate retreated from Wednesday's high at 1.2092 to 1.2058 after President Emmanuel Macron committed to seeing out his term and the influential Marine Le Pen said her party would back the new government's budget.

The proviso is that Michel Barnier's replacement seeks to cut France's budget deficit at a slower pace.

The Euro to Dollar exchange rate rose 0.70% on Thursday after Barnier resigned and is defending gains at 1.0573 ahead of Friday's U.S. jobs report.

"For now, we do not see major euro downside from the political sagas in either Germany or France, and we expect the currency to gain ground," says Dominic Schnider, Strategist at UBS Switzerland AG.

The Euro looks to be defending key support levels against most currencies, suggesting the worst of the French crisis has passed.

Visibility is improving: Macron will soon appoint a Prime Minister, whose priority will be approving a budget, with a special law submitted to parliament before mid-December to keep the state running in the interim.

The outgoing finance minister has previously warned that the stopgap emergency legislation could have unintended consequences, including increasing income tax for millions of households.

However, for markets, this fiscal restraint implies a step in the right direction for the debt-laden French state. It could steady French bond yields and ease some angst about the Euro.

"While the political situation remains unpredictable, the budget continuity should help reduce investor concerns around short-term fiscal stability," says Claudia Panseri, Chief Investment Officer at UBS WM France.

Marine Le Pen, leader of RN, the National Assembly's largest party, says such a measure is preferable to outgoing Prime Minister Michel Barnier's budget that sought to cut the deficit by €60BN in 2025 through a combination of tax rises and spending cuts.

Barnier wanted to lower the deficit to 5% of GDP next year from 6.1% in 2024 and 3% by 2029.

But Le Pen says her party will support the next Prime Minister's budget provided it narrows the deficit more slowly.

"We want to absorb the deficits, but we want to do it intelligently, without depriving ourselves of the chance to reindustrialise, to help companies," Le Pen told Bloomberg. "This is such an essential problem for us."

"In reality, French risk had not hit the euro too much, and equally, we do not see the need for EUR/USD to rally too far on news that Marine Le Pen is not seeking the ousting of President Emmanuel Macron. However, political uncertainty will be unwelcome and French growth will still disappoint," says Chris Turner, Head of FX Strategy at ING Bank.

There are two routes that will allow the country to pass a new budget to ensure the ongoing functioning of the state.

The first would see the new Prime Minister make further concessions to RN, allowing it to force through the budget using a constitutional clause.

Barnier tried this, but this invoked the no-confidence vote that brought him down.

This time, RN will likely abstain from any no-confidence vote triggered by leftist parties. This means RN would not have voted for the budget but wouldn't have brought down the government.

The second option would be to extend the existing 2024 budget.

"A special bill extending the 2024 budget into 2025. This would ensure a relatively normal functioning of the state next year. Both the far right and the far left have stated that they would vote for such a bill," says Panseri.

The UBS analyst says public spending would then be capped, and a proper budget bill would need to be adopted in 2025.


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