Euro shrugs off France’s crisis, for now
The euro barely blinked at the collapse of French Prime Minister François Bayrou’s government, an outcome widely anticipated. In fact, EUR/USD has nudged up to a one-month high, hovering around half a cent below a fresh four-year peak. But the calm may be deceptive. France’s deepening political and fiscal instability is quietly eroding the foundations of the eurozone, and the single currency’s composure could soon crack.
Markets are in limbo, awaiting President Emmanuel Macron’s next move, his fifth prime ministerial appointment in under two years. Yet the churn at the top masks a more systemic fragility. France is now the euro area’s fiscal outlier, with a deficit projected to hit 6.1% of GDP next year, far above the 4.6% target submitted to Brussels. Without corrective action, debt is on track to surge from 113% of GDP in 2024 to over 125% by 2029. The Finance Ministry’s own figures paint a bleak trajectory: €51.1 billion in additional spending next year alone.
This isn’t just a French problem. Germany, the eurozone’s other economic pillar, is also buckling under weak growth and rising unemployment. Together, the twin engines of the eurozone are misfiring – and yet markets remain oddly complacent. Swap pricing implies just a 37% chance of another ECB rate cut this year, despite mounting evidence that political dysfunction and fiscal slippage in Paris could force the central bank’s hand.
If Macron’s next prime minister fails to build a coalition or present a credible budget, French OAT spreads will likely widen again – surely dragging euro sentiment down with them? That said, as long as France’s political instability remains siloed from broader eurozone risk, it’s unlikely to derail EUR/USD’s 2025 rally – especially with dollar weakness still driving the narrative. Although we think a fresh catalyst is needed to give the pair a further push higher.
How dovish can the Fed get?
The dollar index – DXY – continues to struggle in breaking decisively below support at 97.500, despite briefly dipping beneath it on Friday following the NFP release.
Today’s preliminary annual benchmark revision to the 2025 NFP report is expected to show significant downward adjustments. However, the impact on the dollar is likely to be limited: Fed rate cuts are already well priced in, and there’s sufficient evidence that the labor market has cooled – particularly in response to tariff pressures.
This week’s inflation data – PPI on Wednesday and CPI on Thursday – are also unlikely to trigger major dollar moves in isolation. Still, it will be crucial in shaping next week’s forward guidance at the Fed policy meeting. If the data confirms that tariff-induced pass-through remains contained, it could fuel speculation of a more overtly dovish Fed stance, increasing the likelihood of a jumbo 50 basis point cut. That scenario would likely drive a more pronounced dollar decline.
GBP/USD eyes 1.36, but lacks fresh catalyst
Sterling is navigating a relatively quiet week, with softening US macro data remaining the dominant driver of price action. This will temporarily assuage the pound’s underlying bearish pressure: fiscal concerns tied to the UK government’s rigid fiscal rule. Having said that, even if tomorrow’s and Thursday’s US inflation data come in softer than expected, it is unlikely to move GBP/USD meaningfully, as expectations of a Fed cut in September are largely priced in. As a result, we see the 1.36 resistance level as unbreachable this week.
Domestically, investors will also be watching Friday’s release of monthly GDP, manufacturing, and construction output for signs of economic momentum. However, the prints are unlikely to shift the cautious tone the Bank of England has reiterated in recent communications. A dovish tilt is likely to assert itself further out, with sticky inflation remaining the BoE’s key concern for now. However, while the impact on sterling via the yield channel remains muted, its underlying sensitivity to rate expectations has increased over the summer compared to the spring, when an overly negative USD sentiment largely overshadowed the influence of rate differentials. This suggests that when the BoE adopts a more dovish stance, the effect on GBP will be more pronounced.
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Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: September 8-12
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
