EUR/USD Declines Below 1.0500 as French Political Crisis Weighs on Euro

The EUR/USD pair dropped to around 1.0490 during the early European session on Tuesday, with the Euro weakening against the U.S. Dollar due to political tensions in France. A budget standoff has sparked concerns about the Eurozone’s second-largest economy. French Prime Minister Michel Barnier's move to pass a social security bill without parliamentary approval has led opposition parties to announce plans to file a no-confidence motion against him. This could result in the collapse of the French government later this week.

The political instability in France is putting downward pressure on the Euro. Meanwhile, the yield gap between French and German 10-year government bonds widened by 7.6 basis points to 87.3 bps, after reaching 90 bps last week, its highest level since 2012. Kyle Chapman, FX market analyst at Ballinger Group, noted that the combination of political turmoil in France and strong U.S. economic data has given the Euro a poor start to December.

In the U.S., economic data released on Monday showed a boost in manufacturing activity in November, suggesting a robust economy, which supported the U.S. Dollar. However, the U.S. Federal Reserve remains data-dependent, with Friday’s Nonfarm Payrolls (NFP) report likely to influence expectations for a potential rate cut on December 18.

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