Investing.com – The French government bond market saw significant pressure following the weekend's European elections, with the 10-year OAT-Bund spread widening sharply by 7-8 basis points, reaching the widest levels seen since last year. The pressure on the bond market is not surprising after Standard & Poor's recently downgraded France's sovereign credit rating to AA- from AA amid budget concerns. This reduction was affected by last year's larger-than-expected budget deficit of 5.5% of GDP, which was attributed to weak growth and weak revenues.
Macron's government was already struggling with fiscal consolidation, and the worry now is that any National Rally government will follow a Trump-style approach to fiscal consolidation – aiming to stimulate growth as a way to address fiscal issues.
On June 19, ING economists predict that the European Commission may initiate excessive deficit measures against France, which could have major repercussions for the euro. The next French government's response to this measure will be decisive. Although the latest opinion polls indicate that Marine Le Pen's National Front party may win the largest share of votes in the upcoming elections scheduled for June 30 and July 7, but will not achieve an absolute majority, the focus is likely to shift to potential coalitions and their policies. Ramifications.
In the current climate, the euro is expected to face difficulties in rising, as expectations indicate that it will range around the 1.07/08 level, taking into account downside risks. Today, attention turns to eurozone speakers, including ECB Chief Economist Philip Lane, who is scheduled to speak at 1:05pm CET. Despite the ECB's reluctance to commit to further easing measures, with another 31 basis points already priced in for this year, the central bank may adopt a firm stance in the near term to mitigate the potential impact of a weak euro on disinflation.
The exchange rate is now facing strong resistance at the 1.0800 level, reflecting the market's response to the gathering political and financial uncertainties in France.
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