French Politics Might Weigh More on the Euro Than the ECB Rate Cut Today

ECB Rate Cut Expectations

The European Central Bank (ECB) is widely expected to reduce interest rates by 25 basis points during its upcoming December meeting. Market projections suggest that the easing cycle will continue until the deposit rate reaches 1.5% by late 2025. Despite the meeting-by-meeting approach adopted by the ECB, there is a clear directional tilt toward further monetary easing.

This policy trajectory is anticipated to have mixed effects:

• Bullish for European Stocks: Lower rates could stimulate growth, boosting equity markets.
• Bearish for the Euro: Although the downside for the Euro is expected to be limited, the easing bias could exert sustained pressure on the currency.

Regulation and Communication

The ECB’s communication strategy will play a pivotal role in shaping market sentiment. Key elements include:

• Meeting-by-Meeting Approach: While decisions will remain data-dependent, the ECB is likely to provide guidance indicating a gradual move toward lower neutral rates.
• Lagarde’s Press Conference: President Christine Lagarde’s commentary will be closely analyzed for clarity on the central bank’s easing trajectory.

Inflation forecasts by the ECB suggest that by 2027, inflation will likely stabilize at or just below the target level. This outlook supports the gradual return to a neutral monetary policy stance in the longer term.

EUR/USD Chart Weekly – Resuming the Decline After the Short-Lived Retrace

The immediate outlook for the Euro suggests moderate downside risks. Factors influencing this outlook include:

• Monetary Policy Divergence: The ECB’s dovish stance contrasts sharply with a relatively more stable or hawkish approach by the Federal Reserve and the Bank of Japan. This could lead to Euro underperformance, especially against the USD and JPY.
• US Trade Policy Uncertainty: Uncertainty around US trade policies may add additional pressure on the Euro, making it more vulnerable to external shocks.

New Prime Minister in France

French President Emmanuel Macron is set to announce the appointment of a new prime minister today. This comes after the removal of Prime Minister Michel Barnier from office last week. Macron’s strategy focuses on engaging with moderate political forces, deliberately excluding the left wing France Unbowed party, led by Jean-Luc Mélenchon, and the conservative National Rally, headed by Marine Le Pen, from the discussions.

While no final decision has been confirmed, potential candidates for the position reportedly include former Defense Minister Sébastien Lecornu and Justice Minister François Bayrou. The announcement is expected to signal Macron’s approach to accumulating whoever he can in a political alliance to remain in power despite ending up the major loser of the recent French elections. So, it might not go as smooth, which would be another drag for the Euro.