EUR/USD Holds Steady Despite French Political Tensions and Budget Deficit Warnings

EUR/USD Holds Steady Despite French Political Tensions and Budget Deficit Warnings

The Euro (EUR) faced a bout of political noise on Tuesday, but the EUR/USD currency pair held firm, trading around 1.16, mostly reflecting broader US Dollar sentiment rather than domestic European developments.

Renewed tensions within the French government were triggered after Prime Minister Gabriel Attal proposed canceling two national holidays as part of fiscal reforms aimed at reducing the budget deficit. The move sparked sharp criticism from National Rally leader Marine Le Pen, who threatened to collapse the government if the plan isn’t scrapped.

French Deficit: A Sleeping Threat to EU Sentiment

While the French deficit had been mostly out of headlines in recent months, Tuesday’s events served as a reminder of fiscal fragility in the eurozone’s second-largest economy.

Despite the headlines, the OAT-Bund spread—a key gauge of French risk relative to Germany—remained unaffected, suggesting that financial markets still view this as a contained domestic issue, at least for now.

Analyst Note:
“This deficit situation is a time bomb for EU sentiment, and while FX spillovers are limited today, that could change later this year.”

EUR/USD Still Follows Broader Dollar Trend

The direction of EUR/USD remains tied to USD sentiment. Recent hawkish repricing of Fed expectations, following strong inflation data, has supported the Greenback. If this trend continues, the pair may begin to drift toward 1.15, especially if US macroeconomic data continues to surprise to the upside.

Related Reads on Tredu.com:

• Why the US Dollar Remains King in FX Markets
• What the OAT-Bund Spread Tells Us About France
• How Political Risk Impacts the Euro