The euro rebounded above the $1.16 mark on Wednesday, recovering from a two-month low, as investors welcomed growing signs of political stability in France following the government’s successful budget presentation.
The euro, which had earlier tested the $1.1542 support level, found renewed strength as market sentiment improved in response to fiscal clarity and easing domestic uncertainty in France. According to recent FX data, the currency’s recovery was driven by revived investor confidence and expectations of upcoming monetary easing from the U.S. Federal Reserve.
Political Calm in France Restores Investor Optimism
France’s political landscape, previously under strain due to controversial pension reform plans and fiscal disagreements, stabilized after Prime Minister Gabriel Lecornu presented a balanced budget compromise to parliament.
The proposed adjustments, including the temporary suspension of pension reforms until the 2027 presidential election, were designed to gain Socialist Party support and prevent another government collapse. Analysts said this move signaled a pragmatic shift in fiscal management that could extend Lecornu’s tenure and enhance policy predictability.
“France’s compromise budget has reassured investors and boosted confidence in the eurozone’s second-largest economy,” said one market strategist. “The euro’s rebound reflects a relief rally as political volatility recedes.”
French assets also gained ground, with bonds and equities rising modestly following the announcement, further supporting the single currency’s recovery against both the U.S. dollar and the British pound.
Fed Rate Cut Expectations Weigh on U.S. Dollar
The U.S. dollar, meanwhile, faced renewed selling pressure as expectations of an October interest rate cut by the Federal Reserve intensified. Comments from Fed Chair Jerome Powell acknowledging a “softening” labor market reinforced investor belief that another round of monetary easing was imminent.
The U.S. government shutdown, now in its third week, has further eroded confidence in the dollar as traders remain cautious in the absence of updated economic data. The shutdown’s ripple effect on federal operations has left markets increasingly reliant on Fed statements for direction.
Tensions between the U.S. and China have also worsened. Both countries imposed reciprocal port fees on shipping companies, while China extended sanctions on U.S.-linked Hanwha subsidiaries. President Trump’s renewed threat to impose 100% tariffs on Chinese goods next month has heightened fears of a prolonged trade war, adding downward pressure on the greenback.
Eurozone’s Stability Offers a Breather
In contrast to the Fed’s dovish outlook, the European Central Bank (ECB) has signaled no immediate plans to adjust interest rates, choosing to maintain policy stability while monitoring inflationary trends.
Market analysts say the euro’s performance in the coming weeks will depend on sustained political stability in France and broader eurozone economic data. “If France maintains fiscal discipline and the ECB keeps its policy steady, the euro could continue appreciating against the dollar,” analysts said.
With the dollar’s safe-haven appeal weakening amid domestic political gridlock and international trade tensions, many investors are rotating toward the euro as a relatively stable alternative.
Outlook for EUR/USD
Currency strategists project that if U.S. fiscal uncertainty persists and Fed rate cuts materialize, the EUR/USD pair could maintain upward momentum beyond 1.17 in the near term. However, lingering trade tensions and global market volatility may still influence short-term fluctuations.
The euro’s rebound underscores the currency market’s sensitivity to political developments, as France’s ability to stabilize its domestic landscape and pass a compromise budget has restored confidence in European economic governance at a critical moment.
