French Politics to Keep Euro Subdued
The political turmoil in France will keep Euro subdued against its major trading partners. France’s lower house of parliament Wednesday started debating two no-confidence motions in a session widely expected to topple the minority government of Prime Minister Michel Barnier in a historic vote.
The ousting of the Barnier government after just three months in office would deepen the country’s political crisis and present President Emmanuel Macron with the unenviable choice of picking a viable successor with over two years of his presidential term left.
331 MPs from the left and far right voted in unison, and the government fell, less than three months after it was set up. France is thus entering a new era of political instability, ING Chris Turner said in a note.
It is noted that there will be no dissolution of the National Assembly or early elections until July 2025, as the Constitution stipulates a minimum period of one year between elections.
President Emmanuel Macron will have to appoint a new prime minister, who will have to form a new government.
With the National Assembly highly polarised and divided into three main camps – left, centre-right and far-right – finding a new prime minister who will not face a motion of no confidence directly will be a very difficult mission, according to ING.
“It is therefore likely that France will remain without a government for several weeks, if not months”, Turner said.
While some may see it as some kind of positive in that fiscal restraint is delayed, Charlotte de Montpellier ING economist thinks that weak business investment means that France will only grow by 0.6% next year.
Add in Germany contracting at 0.2% next year and Eurozone GDP for the year comes in at just 0.7% – thanks to southern Europe!
“We see the ECB cutting rates to 1.75% next year”. Turner said this should keep short-dated EUR:USD rate spreads near 200bp in favour of the dollar all year and, as Barry Eichengreen says, bring EUR/USD close to parity.In terms of Eurozone data today, analyst see more soft industrial data and then a downward correction in retail sales.
“We are still minded that short-term resistance at 1.0550 may be the extent of the EUR/USD recovery and see a case that EUR/USD hovers near 1.0500 over the coming days – given there seems to be more than $5 billion of 1.0500 FX option strikes at that level expiring over the coming week”.
Elsewhere, GBP:USD briefly sold off and then recovered after Bank of England Governor Andrew Bailey seemed to confirm that the BoE was looking at four rate cuts over the next year, with the market only pricing three.
However, those remarks did look a bit ‘technical’ – in that they merely confirmed what the BoE had been using in its models for its forecasts. Expect EUR/GBP to stay gently offered and look out for inflation expectations today and a speech by BoE hawk, Megan Greene
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