While investors focus on the conflict in the Middle East and the US-Canada trade war, France is gearing up for another round of parliamentary debates over the budget. Renewed political uncertainty could weigh on the EUR/USD pair. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The US Treasury’s strategies are working.
- France may put pressure on the euro.
- The Fed has not ruled out a rate hike in September.
- Short positions can be increased if the EUR/USD pair breaks through 1.165.
Weekly Euro Fundamental Forecast
Initiative can be a risky business. Not in Scott Bessent’s case, however. Despite criticism of the Treasury Secretary’s plans to exert greater control over Treasury yields and impose relatively modest sanctions on Iran under the high-profile label of an “economic pariah,” his strategy appears to be working.
Brent crude is falling as US measures against Tehran have had a limited impact on the oil market so far, while tensions in the Middle East have eased somewhat. Iran and Oman have also resumed negotiations on reopening the Strait of Hormuz. Lower oil prices, combined with the Treasury’s willingness to intervene in the bond market, have pushed Treasury yields lower. At the same time, stock indices have risen, tempering EUR/USD bears.
Lower Brent prices and US Treasury yields, together with a stronger S&P 500, are providing support for the euro. However, a long-standing problem could soon resurface for the single currency. France is heading toward another round of parliamentary clashes over the budget—confrontations that have previously contributed to prime ministerial resignations. Against this backdrop, the yield spread between French and German government bonds, a key gauge of political risk in the euro area, is widening.
France-Germany Bond Yield Spread
Source: Bloomberg.
If the next budget proposal fails, France could be left with the largest deficit-to-GDP ratio among Europe’s major economies, while public debt continues to climb ahead of the presidential election in April–May 2027. That is precisely why the current debate over the government’s main financial plan could prove particularly challenging for Emmanuel Macron and his administration.
Budget Balance in European Countries
Source: Bloomberg.
Previous waves of political crises in France have hurt the euro. This new political saga is sure to add volatility to the EUR/USD. Investors will have to navigate factors such as geopolitics, trade wars, and erosion of confidence in the US dollar due to actions by the US administration and the Fed. At the same time, they should keep in mind the Fed’s monetary tightening.
According to FOMC member Susan Collins, if there is no clear evidence of a sustained disinflationary trend, monetary policy may need to remain restrictive. It seems that two consecutive reports showing slower inflation may not be enough to convince Fed officials. With Brent’s rally resuming in July and August, a third favorable inflation report may not be forthcoming.
Against this backdrop, political uncertainty in France could add another layer of complexity to the already uncertain outlook for EUR/USD quotes. To navigate these murky waters, traders will need to keep a close eye on the oil and bond markets, while also monitoring stock indices.
Weekly EURUSD Trading Plan
The EUR/USD pullback could deepen if the pair falls below 1.165. In that case, traders could add to existing short positions. If the support holds, however, buying opportunities may emerge.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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