Investing.com – The French government bond market came under severe stress following the European elections over the weekend, with the 10-year OAT-Bund spread sharply widening by 7-8 basis points to its widest level since last year. Bond market tensions are not surprising after Standard & Poor’s recently downgraded France’s sovereign credit rating to AA- from AA amid fiscal concerns. The downgrade was driven by a larger-than-expected budget deficit last year of 5.5% of GDP, which was linked to weak growth and weak revenues.
Macron’s government has already struggled with fiscal consolidation, and the worry now is that any National Rally (RN) government would follow Trump’s approach to fiscal consolidation – seeking to stimulate economic growth as a means of solving fiscal problems.
On June 19, economists at ING expect that the European Commission may initiate excessive deficit proceedings against France, which could have serious consequences for the euro. The next French government’s response to this procedure will be decisive. With the latest opinion polls showing Marine Le Pen’s RN party could win the largest share of the vote in the upcoming elections on June 30 and July 7, but fall short of an outright majority, the focus is likely to shift to potential coalitions and their policies. implied.
In the current environment, the euro is expected to struggle to rally, with forecasts suggesting the euro will hover around the 1.07/08 mark, exposed to downside risks. Today attention turns to eurozone speakers, including European Central Bank chief economist Philip Lane, who will speak at 13:05 CET. Despite the ECB’s reluctance to commit to further easing, with a further 31 basis points of easing already pledged this year, the central bank could take a firm stance in the short term to mitigate the potential impact of euro weakness on the deflation process.
The exchange rate now faces strong resistance at 1.0800, reflecting the market’s reaction to the confluence of political and financial uncertainty in France.
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