The euro is on track to post its fourth consecutive weekly loss, but the euro currency stability is holding up better than expected, especially in light of the ongoing political turmoil in France. Despite a recent no-confidence vote that ousted Prime Minister Michel Barnier and deepened the political crisis in the eurozone’s second-largest economy, the common currency is still managing to find some stability. 

In such uncertain times, trading with and following reliable forex brokers like YaMarkets becomes even more important. We provide the expertise and resources traders need to understand the challenges of the forex market, especially when major currencies like the euro face instability.

The Political Uncertainty In France 

On the surface, France’s political instability should be a strong headwind for the euro. The far-right and left-wing factions in France recently united to back a no-confidence motion, which led to Barnier’s resignation. The outcome has left France without a stable government and without a budget for 2025—two factors that could undermine investor confidence in French assets and the euro. Markets are worried about the impact on France’s sovereign creditworthiness and potential slower economic growth.

However, the situation is more nuanced than it first appears. While the political crisis in France does raise concerns, the reaction in the bond markets has been more muted. For instance, the spread between French and German 10-year bond yields—an indicator of the risk premium investors demand to hold French debt rather than German bunds—actually narrowed after the French government’s fall. The spread tightened to 77.2 basis points (bps), its lowest level in almost two weeks, from a peak of 90 bps earlier in the week. This easing in risk perception can be attributed to optimism that France will pass its budget and that the political gridlock may be temporary.

The Influence of Marine Le Pen’s Reassurance 

A significant factor in calming market nerves was the intervention of Marine Le Pen, the leader of the far-right National Rally (RN). Although her party had backed the no-confidence motion against Barnier, she reassured markets by indicating that there were no plans to remove President Macron from office and that a budget could be passed within weeks. This political stability message provided some comfort to investors, suggesting that France might be able to navigate its political crisis and pass essential economic policies, including the budget. Le Pen’s remarks helped tighten the spread between French and German yields and alleviated fears of a credit downgrade.

The Impact of Germany’s Defence Fund Plans

Another reason the euro currency stability hasn’t been severely impacted by the French crisis is the market’s focus on Germany’s borrowing costs. Recently, the Financial Times reported that European Union countries are discussing a €500 billion joint fund for common defense projects, potentially tapping bond markets to finance it. This news put upward pressure on Germany’s borrowing costs, causing German bond yields to rise by 6 basis points to 2.124%.

Dollar Strength and the ECB vs. Federal Reserve Outlook

Despite the political developments in France and the recent pressure on the euro, the currency is expected to face further challenges due to the broader macroeconomic environment. A key factor is the relative strength of the US dollar. The Federal Reserve is widely expected to cut rates less aggressively than the European Central Bank (ECB) in the first half of 2025, which should keep the dollar on a stronger footing against the euro. While the ECB is likely to continue with more dovish policies due to the economic slowdown in the eurozone, the Fed’s more cautious approach to rate cuts will likely support the dollar, capping the upside for the euro.

Conclusion | Follow The Most Reliable Forex Broker - YaMarkets

Despite political chaos in France and the resulting risks to French sovereign debt, the euro’s decline has been relatively contained, demonstrating a degree of euro currency stability. Market optimism, buoyed by political reassurances from Marine Le Pen and the hope for a budget resolution, has alleviated some of the immediate pressure. Meanwhile, broader developments, such as Germany’s defense fund plans and a likely stronger dollar due to divergent monetary policies, may cap the euro’s gains. As we move into 2025, the balance between these factors will likely shape the euro’s trajectory, with the political landscape in France remaining a key element to watch.

For more detailed analysis of market events, follow and Download the YaMarkets Academy App from the app store and keep learning and trading with YaMarkets, the most reliable forex broker in the industry. 

Risk Warning: Trading forex and other financial instruments involves significant risk and may not be suitable for all investors. Prices can move rapidly against your positions, potentially resulting in substantial losses exceeding your initial investment. Ensure you fully understand the risks involved, seek independent advice if necessary, and only trade with funds you can afford to lose. Past performance is not indicative of future results. Read the full disclaimer on the YaMarkets website.