Euro underperforms as France fiscal risks mount

• Euro faces intense selling pressure against its peers as French fiscal worries mount.
• France vows to reduce its budget deficit to the European Union limit of 3% by 2029.
• Inflation data of September from both the Eurozone and Japan has come in hotter-than-projected.

The Euro (EUR) trades lower against its major currency peers due to mounting fiscal worries in France. In the European trade, the major currency is down 0.35% at around 177.00 against the Japanese Yen (JPY).

The Euro is under pressure as bond yields in France have rallied to the highest since 2002 at 4.96% due to mounting fiscal worries. A report from Associated Press (AP) showed that the public debt in France now stands at 119% of Gross Domestic Product (GDP).

France aims to reduce its budget deficit from a target of 5% of economic output next year to the European Union limit of 3% by 2029. France’s Finance Minister (FM) Roland Lescure also presented the country’s 2027 budget bill on Thursday, stating that the plan will put public finances back on track for budget consolidation, Reuters report.

However, market experts doubt that the minority government in France would be able pass the budget at Parliament without concessions.

Brown Brothers Harriman’s (BBH) Elias Haddad highlights mounting fiscal challenges in France, signaling caution that they “doubt the proposal will clear parliament without significant concessions,” underscoring the political hurdles to meaningful consolidation.

Even if a compromise is reached, BBH points out that France’s fiscal watchdog has warned the economic assumptions embedded in the “2027 draft budget are ‘optimistic’,” raising questions over the credibility of the medium-term path. Against this backdrop, the bank argues that “a rollover of the 2026 budget is the most likely outcome given the limited appetite for compromise before the presidential election on April 18, 2027.”

BBH estimates that such an outcome “could push the deficit from 5.4% of GDP in 2026 to roughly 6.0% in 2027,” a deterioration that would take France “further away from its European Commission commitment to bring it below 3% by 2029.”

On the economic front, preliminary Eurozone Harmonized Index of Consumer Prices (HICP) data for September has come in stronger-than-expected. The headline HICP arrives at 3.8% Year-on-year (YoY), higher than 3.6% estimates and the August reading of 3.2%.

In Japan, Tokyo’s Consumer Price Index (CPI) data for September also came in hotter-than-expected. Tokyo CPI ex. Fresh Food rose by 2.7% Year-on-Year (YoY), faster than 2.4% estimates and the previous reading of 1.8%. The headline inflation accelerates to 2.7% from 1.9% in August.