France's Fiscal Woes Weigh Heavy on Euro

The euro's recent lackluster performance can be attributed to France, not the European Central Bank (ECB). Despite the ECB's hawkish tone at its July meeting, the euro failed to rally. The market is now more focused on Paris than Frankfurt.

ING noted that euro rates are facing a hawkish central bank while investors reassess France's fiscal position. Eurozone bond spreads have pushed beyond 85 basis points in recent weeks, with France trading wider than Italy.

This development challenges the assumption that France is an anchor for the monetary union. With a large deficit and public debt above 116% of GDP, France's government lacks a dependable parliamentary majority.

The approaching 2027 presidential election will only make consolidation harder. Markets are concerned about the incoming government's ability to impose spending cuts and reforms.