Euro Fails to Recover Despite French Political Fix

Although the political situation in France has been fixed temporarily, the euro remains pressured amid broader concerns heading into the new year.

Patch or Solution?

Following a week-long waiting process that fueled uncertainty, markets experienced modest relief after French President Emmanuel Macron selected Francois Bayrou, 73, leader of the centrist MoDem party, as Prime Minister. EURUSD briefly popped back above 1.0500 but failed to recover the weekly losses, as underlying issues that prompted former PM Michel Barnier's departure linger. Macron opted for a centrist to rule out a potential Socialist alliance, though the centre-left agreed to budget discussions without joining the government.

While Bayrou's reputation for cross-party cooperation might help tackle France's debt concerns, he described the challenge ahead as a "Himalaya" of difficulty. Bayrou has close ties to Macron, which may fail to appease the hard-left and hard-right coalition that toppled the government. Macron also insists on serving his full term, highlighting lingering political instability concerns as neither the left nor right have agreed to work with Bayrou.

Troubled Waters

The French political drama unfolds at an inconvenient time for Europe. President-elect Donald Trump's return with a potentially tariff-focused agenda looms large, while German Chancellor Olaf Scholz faces a no-confidence vote today. The previous elections resulted in a divided Parliament, requiring an unstable three-party coalition government after prolonged negotiations. Current opinion polls point to another fragmented parliament, with the far-right AfD holding second place behind the CDU despite major parties refusing coalition talks.

Market uncertainty extends to monetary policy after the ECB's recent rate cut last Thursday. Though several governing council members hinted at further easing following the blackout period, the lack of specifics triggered a partial retreat in rate cut expectations, pushing yields higher. Some analysts suggest ECB President Christine Lagarde's comments left room for larger cuts. At the same time, traders must weigh both political developments in Paris and Berlin alongside upcoming economic data to gauge the euro's direction.

EURUSD in Flag Pattern

Price action in EURUSD suggests bearish pressure on the 4-hour timeframe, trading within a bearish flag formation expected to break down eventually. The recent bounce at the lower end of the flag pattern at 1.0450 hints at a potential recovery towards 1.0700, with intermediate resistance at 1.0568 and 1.0630. On the downside, support below the current flag low sits at 1.0400, followed by the November bottom at 1.0333, should selling pressure persist.

Source: SpreadEx / EURUSD

Key Takeaways

Euro failed to recover despite President Macron's French political fix of appointing centrist Francois Bayrou as Prime Minister, as issues that prompted the previous PM's departure continue to linger. Bayrou's cross-party cooperation may help tackle France's debt, but his close ties to Macron could fail to appease the hard-left and hard-right coalitions. Meanwhile, the French drama coincides with instability in Europe’s largest economy, Germany, where Scholz faces a no-confidence vote and a fragmented parliament, with market uncertainty also extending to monetary policy after the ECB's recent rate cut lacked specifics.​