EUR/USD: Same causes, same effects

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The contraction in risk appetite was reflected on the foreign exchange market by a confirmation of the short-term fall in the Euro/Dollar. This rebalancing of forces is linked to the chronic political instability affecting the second economic power in the Euro Zone, an instability reinforced by the surprise resignation on Monday of Sébastien Lecornu.

Above all, this political impasse prevents France from adopting a budget for 2026 and thus correcting the trajectory of its public finances. Goldman Sachs is counting on a deficit of 5.5% of GDP for this year (compared to 5.4% for the government) but above all on 5.3% of GDP for 2026, much more than the 4.7% targeted by the resigning Prime Minister Sébastien Lecornu.

This shock wave revives the specter of a political blockage with the absence of necessary measures to clean up the trajectory of French public finances. “Lecornu’s resignation plunges the political scene into uncertainty. Investors fear a domino effect on economic and budgetary policy,” analyzes Antoine Andreani, head of equity research at XTB France. This put the French 10-year-old once again above its Italian counterpart.

M Lecornu responded yesterday to Léa Salamé’s questions in the 8:00 p.m. news on France 2. He considered that “his mission was completed”, and suggested that the appointment of a new prime minister was imminent. “Finally, President Macron’s cabinet announced that it would present a new Prime Minister on Friday evening. This rules out for the moment the risk of early elections,” observes Deutsche Bank.

“Attention will now focus on the ability of the new Prime Minister to form a government or on the need for Macron to call legislative elections. Polymarket estimates the implicit probability of a new election by the end of the year at 51%, compared to almost 80% yesterday morning,” adds the German bank.

In the meantime, the single currency continues to falter while the French sovereign rate once again exceeds 3.50% at a 10-year maturity, against a backdrop of intense questioning about the profile of the next prime minister (left-wing, technical), and especially his ability to negotiate compromises for a budget with the myriad of political sensitivities at the Assembly. Otherwise, a special law will be adopted, with the renewal in 2026 of the 2025 budget to the nearest euro. Which in the eyes of the markets would obviously be disappointing from the point of view of cleaning up public accounts.

“How can we restore trust in a context of weakened governance?” asks Fidel Martin, President of Exoé. “Businesses, investors and citizens need clear benchmarks and visibility on future economic directions. France, with its industrial base and its attractiveness on the markets, cannot afford to let uncertainty slow down growth and investment.”

Mr. Martin remains “convinced that political stability is an essential lever for the harmonious functioning of financial markets. Investors do not only bet on economic results: they bet on the predictability and consistency of government decisions. Each prolonged ministerial vacancy, each surprise reshuffle, acts as a brake on the appetite for risk and confidence in the French economy.”

At midday on the foreign exchange market, the Euro was trading against $1.1620 approximately.

KEY GRAPHIC ELEMENTS

The bullish oblique that prevailed until now (in black on the chart) is now broken, with a confirmation pullback. The negative view is offered under this oblique, while the relative strength index collapses.

MEDIUM TERM FORECAST

Considering the key graphical factors that we have mentioned, our opinion is negative in the medium term on the Euro Dollar (EURUSD).

Our entry point is at 1.1610 USD. The price target for our bearish scenario is at 1.1013 USD. To preserve the capital invested, we advise you to position a protective stop at 1.1741 USD.

The expected profitability of this Forex strategy is 597 pips and the risk of loss is 131 pips.

DAILY DATA CHART