Global Economics, FX and Rates: French political scenarios for macro markets
The desk assesses the evolving French political landscape as a potential pivot point for macro markets, particularly the FX and rates sectors. Per the full note from J.P. Morgan Global Research, current political dynamics could significantly influence economic policies and monetary stances, integrating into broader macroeconomic forecasts for Europe. Additionally, as market participants recalibrate positions in anticipation of potential changes, the French election timetable is a critical factor to monitor. Observing how the political conversations unfold will provide vital clues on investment positioning and sentiment in the Eurozone.
What the desk is arguing
The desk frames this as a pivotal moment for the Eurozone, where changing political scenarios might spur substantial volatility in FX markets. Per the source, political outcomes will directly affect fiscal policies, possibly leading to shifts in monetary strategy as the European Central Bank navigates these developments.
Supporting this perspective, the discussions highlight that electorally driven policy changes could result in significant economic adjustments, particularly concerning France's fiscal outlook. The implications for the Euro are profound, especially if any of these scenarios suggest a divergence from fiscal restraint, which has been a hallmark of Eurozone policies to date.
Where it sits in our coverage
With a consensus target for the EUR/USD at 1.075, with a range spanning from 1.04 to 1.12, several firms project differing outcomes in light of potential political shifts. Notably, the outlook from jpmorgan at 1.10 (March 2026) aligns closely with this perspective, while bofa holds a contrary view with a more conservative target of 1.04.
This positioning indicates that the desk’s call is slightly above the lower end of the consensus, reflecting a cautious but optimistic stance amidst political uncertainty.
How other firms see it
Currently, firms like jpmorgan and other analysts align with the expectation of a strengthening Euro, considering favorable political conditions. In contrast, firms such as bofa take a more cautious position, wary of the looming risks associated with political instability.
As election-related volatility rises, the EUR/USD trajectory will require close observation, particularly as it may reflect broader market sentiment regarding ECB policies. Additionally, shifts in expectations around Eurozone inflation metrics could intersect with these political scenarios, impacting market dynamics.
01The French political landscape is critical for future Eurozone economic policies.
02Potential electoral outcomes may lead to increased volatility in FX markets.
03Current consensus sees the EUR/USD positioned between 1.04 and 1.12.
04Alignment on Euro strength exists among some analysts amidst political risks.
Market implications
Traders should monitor the EUR/USD closely, especially as political scenarios unfold in France, with crucial insights likely to emerge around key election dates. Additionally, any movement towards the top of the consensus range could trigger reevaluation of positioning leading up to March 2026.
Risks to this view
The primary risk to this outlook would be a significant shift in the political landscape leading to an unexpected outcome in the elections. Should fiscal policy diverge sharply from current expectations or if economic performance deviates negatively, this could lead to a swift decline in the Euro alongside elevated volatility in FX markets.
Hello and welcome to J.P. Morgan's At Any Rate podcast, I'm Meera Chandan, co-head of FX Strategy at J.P. Morgan, and I'm joined today by two of my colleagues, Raphael Brun-Aguerre from our economics team, European economics team, joining us in Paris, and we've got Olivia Chordia, our European rate strategist, joining us from London as well.
Clearly the focus today very much on the French political situation and what it means for the macro outlook for the Eurozone in addition to what it means for rates and FX markets. So we're going to start the process off with Raphael, and Raphael, maybe you can help us set the stage. I know we expected this to happen later this year due to the planned fiscal consolidation that was well advertised, but equally the fiscal tightening that was being proposed by Bariot was much tighter than had been widely expected.
But just curious, how is it that we've run into this problem so quickly and what has really caused the timing for it to be now? Well, I think you're making a good point to start with. The idea was normally to present a bit later at the House in early October and effectively from there discussion starts.
And there was a risk obviously that you would get into a confidence vote because the Bariot government is weak, doesn't have a majority at the House, so as long as basically discussion was ongoing and you would make potentially some concessions at the end, it would be up to the opposition to basically accept the deal or not accept the deal. And if Beirut had basically pushed, like we've done before, the bill, what is called Article 49.3, so basically bypassing the House, in return you would have had a motion of no confidence. So effectively what happens now is that Beirut has decided to basically shorten the timeframe.
It's basically mentioned that we would have a vote of confidence on September the 8th. What is surprising in a way is that by doing this it doesn't allow time for negotiations, concessions. I think he had in mind that it could work that potentially the national rally would abstain on September 8th instead of voting against and basically maybe at the back of his mind was the idea that because he was keen on proportional representation at the House he would basically push that forward.
The RN is something that the party wants for some time, so maybe he had in mind that he could basically do it. But effectively what happened on Monday following the announcement is that many parties, including the RN party, mentioned that they would vote against the government. So what is very likely on the 8th of September is to see Beirut falling.
There's a few days for negotiation. Beirut has offered to negotiate, but again that negotiation seems fairly closed in a sense because it doesn't want to discuss the amount of fiscal tightening that it wants to do, maybe the measures within it. And this amount of fiscal tightening, as you rightly pointed out, is a lot of tightening and something that other parties are not willing to go with.
So if the baseline is that the Beirut government falls on September 8th, that it does lead to a whole other host of scenarios. So let's talk about those scenarios. What's the most likely outcome after that?
I think the important question here, at least from a market participant's point of view, is do you envision any changes to the macro outlook for France or systemic, you know, the vision to come out? Yes. So after the vote, it's all in the hands of Macron.
So I'm going to talk about maybe what I think we should define as a fairly short timeframe. We're not going to, at least when I'm going to present the outlook, talking about what could happen in six months' time. I think we need to basically define what Macron would do as a next step.
In the mind of Macron, there is still the idea that he would like to have something stable. What do you mean by that? Something stable is basically if you take the current coalition, which is the people behind Macron, so the centre parties plus the right-wing Republican Party, and tack to that the centre-left Socialist Party.
If you do that, you basically get something that is close to an absolute majority of the House. So it basically solves your problem. The issue with that is to have these people basically working together.
So Macron wanted that from the start. It didn't happen. He basically had to have Barnier coming in and then Beirut coming in, but that didn't work.
I think he would try in the first instance to have that again. The way to do that is eventually to offer some concessions to the left, and maybe in terms of the person that basically can lead the pack, it's effectively to have somebody that is not coming from party ranks, somebody that would offer the flavour of a technocratic government for the next 18 months before the presidential election. The other possibility, if nothing flies and nothing is in a table, is basically to go towards an election.
I think the likelihood of that is a bit less, but it's quite significant. Effectively, when we get into that, there is a lot of different outcomes we can discuss. I would just point to something.
I think the outcome that is most likely at the moment is probably to have a relative majority with RN, so the National Valley, that is ahead of the elections. That didn't happen last year because something was in place and was powerful, it's basically what we call the Republican Front, which is because it's a two-round election, people can drop as they head into the second round. So MPs, potential MPs, drop from the race, and the result is that they tactically try to have RN MPs not being in a position to win a seat.
That was effective, it worked, RN didn't get the majority of seats. But I think on this occasion, it's likely not to be as effective. So if we have an election, that would be the outcome that we should think about.
There's a third option on which I would put very little weight, which is the possibility of Macron to resign, but I don't think it's in a card. That's not something that Macron would like to do. In terms of macro impact, obviously, we have to think about two important channels.
The first one is the macro impact through uncertainty, we've seen it last year. Uncertainty doesn't bode well with growth in terms of investment, in terms of household spending. And the other channel, obviously, because it's about a discussion on the budget, most likely.
It's something that most likely would impact the fiscal stance. But I would just say one thing up front, the debate is around that fiscal or budget considerations. And I would think that generally, we should be thinking about some scenarios that would still convey some fiscal consideration, maybe much less than what Barnier, basically, Beirut wants to see, but still some fiscal consideration.
The only case scenario would be maybe the left coalition, which would be a bit different. Yeah. So it sounds like at least based on your forecast, you're looking for a two tenths tightening in the budget deficit.
And that's to 5.3 percent next year. So it sounds like even if we are getting a relative majority government, the fiscal slippage is actually going to be not that much. So I'm asking about the fiscal slippage, because that is really the main transmission mechanism into rates and affects markets.
Do we have any sense of what that fiscal slippage would be, if at all? And if there is not fiscal slippage, what is really driving that change in stance? Because that was clearly a concern for markets last year.
Yes. So maybe the way to think about things is that Beirut is basically proposing something which is a lot of fiscal tightening. And just to give numbers, it's basically something that in terms of primary structural adjustment is something that is close to one percentage point of GDP, which is very strong because the European Commission rules basically only require a country that is in EDP to do something which is 0.5.
So basically, Beirut went very strong on the fiscal tightening. So I think negotiations would have allowed that you have much less fiscal consideration, but still be compliant with EC rules. And then you could have eventually some slippage over time.
But I think if we look at the main scenarios, I've mentioned RN, we could still have something which is a split house. We could have a PM that is coming from the same sort of house majority that we have at the moment. It's basically something that hints towards something called consolidation.
So I would have in mind that even the RN party has mentioned last year that it wanted to comply with EC rules. So let's start with something which is what the EC would like to see, which is a 0.5 adjustment and maybe have a bit of slippage around that, which is effectively how we get to the forecast that we have, which is 5.3 percent of deficit next year. We had 5.8 last year.
We're probably going to do a few tenths this year and we could do another few tenths next year. So that definitely feels like a different narrative compared to last year, where the market concern was primarily the fiscal slippage. But, you know, as you were saying that, it just occurred to me if if the proposed tightening was as much as one percent of GDP and consensus and your forecast is closer, was closer to a two tenths tightening, is it still possible to get a negotiated outcome here?
Because you know, we could have Beirut essentially compromising with a less tightening in the fiscal stance. Right. Yeah, but Beirut basically, we had him on TV yesterday, he's not willing to compromise on the numbers.
He's happy to compromise on what are the measures to achieve this fiscal tightening, but not so much in terms of the amount of fiscal tightening. I think basically he closed the door to significant negotiations. So the next step is to use an XBM, whether it's basically the choice of Macron or the results of the new election, and effectively starting from there and see where the budget discussion is going to head.
And I think I think that's an important point. The last year, basically, with first Barnier and then Beirut and especially Beirut, have basically crystallised attention on the fiscal adjustment that I think is generally recognised as something that has to happen. So it would be for me difficult to see a new PM coming in and completely put aside that fiscal adjustment requirement.
Maybe a different scenario would be from the left coalition, which in the programme last year had more expenditure, but at the same time more revenues. But interestingly, had been fairly explicit on the rejection of EU rules. So in that case, you could imagine a scenario where you have no fiscal consolidation.
Thanks a lot for that, Raphael, very clear. Then maybe we can shift gears and talk a bit about rate markets, transmission, Aditya. Clearly, that's the cleanest market to play in.
If you were playing the scene, I mean, I'm looking at it from the FX vantage point where euro is more a combination of many different things. What do you think of the reaction in bond markets so far and particularly in the scenarios that Raphael has outlined? It seems like the fiscal channel is just a lot more muted this time.
Yeah, so clearly the market did react a bit like the French 10 year spread to Germany widened almost 10 basis point since the Monday surprise announcement. And we reached the 10 year transfer spread around 80 basis point level. Just to give you a context that we were close to 90 basis point at the whites early this year when we had the whole Barney government and the 2025 budget issues going on at the peak of that period.
So we are still a bit away from that, but clearly market has reprised some political scremia into the French spreads, which is not surprising. And like when I look at some of my fair value models, like I see almost 10 basis point of political discount now getting priced like just to give you a context before summer, we were not pricing anything like market was looking to carry trades and they were waiting like saying, OK, this political noise will increase around the budget, which will happen mostly late September, October. So people were waiting for it.
I think this just came a bit early, but I don't think it's a big surprise apart from the timing. This was something which was expected in terms of scenarios, as I mentioned, right, like the government falling on the confidence vote is sort of a very high probability scenario. So let's assume if that happens, because if that if he survives, I think we go back to where we were before Monday.
But and we reprised the political discount out. But let's say if that scenario plays out where his government falls, as I mentioned, the most likely scenario is like Macron tries to find a new prime minister within the current parliament. And if that prime minister is able to win a confidence vote, I believe that will reduce the political risk premia again materially.
So we'll be a bit higher than where we were before. But I think we might move back to a 65 to 75 basis point range, like something similar to what we were trading in the past few months. So it will reduce uncertainty a lot.
But still, the questions around how the new PM will approve the budget and everything will stay. And we will have to see how that process evolves. But clearly, market will realize that, OK, there is nothing which is going towards a destructive scenario.
I think the interesting things happens when election comes into play. Like if we go towards a lower house election, if Macron is not able to find a PM and he has to call the lower house election, as I mentioned, the most likely scenario would be, as things turn again, we don't have much polls, we don't know how the left will react. What are the party manifestos?
It's still very early phases. But I think based on what we know so far, I think our relative majority seems like a most likely option. But the challenge remains there.
What similar to what the current centrist government has, like will they be able to find some external support to deliver their agenda or any fiscal plans or will they be facing confidence vote, which will lead to more destructive lower house? So, again, in that scenario, I still believe given it's a relative majority, they won't be able to do much destructive fiscal stances because they will have to rely on most likely centrist like a center right support or the current Macron camp to approve any form of budget. So in that world, I still believe the French spreads will still price a bit more ongoing political noise.
So let's say somewhere around 75 to 85 basis point range. So something which we have been trading over the past few days and wider than where we were before Monday, but nothing but still close or below the peaks we saw early this year. The interesting scenario comes when Aaron wins an absolute maturity.
And I think that's where we are making a judgment call, because when they get an absolute maturity, they will have to make a decision. Either they go down a destructive route or they they do a more prudent fiscal policy. And our judgment is that given they have a big price in front of them, which is a 2027 presidential election, which for them is what they are aiming for, like the lower house is just a step towards getting to that price in that world.
I think it will make more sense for them to be a bit more, let's say, prudent, not create a crisis because they don't want to be deemed as a boundary, which is not which is creating crisis, which is not able to solve things. So in that world, I think if that judgment is right, I think French spreads can settle around a 70, 80 basis point range. So somewhere lower than what I would expect in a relative maturity scenario.
Clearly, this is a judgment call we are making here in our scenario analysis. If, let's say, Aaron decides to take a more confrontational approach, spreads could be significantly wider. In the whole scenario analysis, the most destructive scenarios under a new election are the ones where you get some form of left wing government, because in that you will have the whole fiscal concern because they have a very expensive fiscal agenda.
And given where the fiscal state of France is right now, I think that is a big concern, as you also highlighted. And in that world, we can easily see French spreads widening materially. Let's say 100 basis point can easily be breached.
What is the absolute level they can reach is very hard to put a number there, but it will be a very destructive scenario and something we'll have to give for those spreads to revert. So given all what I've discussed so far, I think the recent market reaction where they have priced this 10 basis point of political discount in the spread, that seems reasonable to us. And we expect that 10-year France, I expect to stay in the 75 to 85 basis point range over the coming weeks till there is some clarity on the direction of the political developments.
So overall speaking, I think it's clearly less exciting than what we had last year. And we are going to say move in this 10-15 basis point ranges for most of the scenarios. I see that with the scenarios I was comparing the table to last year, and it did strike out to me also that if they're not an absolute majority, you actually had a narrower level of spreads compared to a majority outcome, which is quite interesting.
But, you know, that was sort of a related question I had. And last year we saw more than a 35 basis point widening in spreads, you know, versus Germany. And this time we actually think they could get more seeds, but we're not really pensioning in a large enough reaction.
You know, I guess this does come down to, I mean, is positioning an issue, by the way? I mean, does this come down to the R&N reactions just going to be quite tame and measured on the basis point? So I don't think it's the position.
I think it's not that heavy. Like it's not necessarily people are long. I think on the margin, people might have been small shorts or neutral.
I think it's not necessarily the R&N judgment, but it's also I think we already had a step, let's say, adjustment last year. Like France had historically traded very expensive on our fair value frameworks in our sovereignist framework, which we run, which we have been running for the past decade or so. France always traded 30, 35 basis point too tight versus the fundamentals and relative to other euro area sovereigns.
And we always assign that to, let's say, market liquidity, strong institutions, macro financial stability, deeper and sticker investor base, all these side of technical and let's say institutional factors. But the political developments of 2024, where we got this whole concept of cohabitation, it clearly challenged the macro financial stability pillars, which historically have kept France quite expensive versus fundamentals. And what we saw was this 30, 35 basis point of widening, which you mentioned, which in our view was moving to fair value.
Like the spreads were expensive because of these technical and structural reasons. But as the structural pillars got challenged, market sort of removed that expensiveness. So that adjustment has been done.
And now they seem fair as we entered into this year's political noise. Like last year, the procedure corrected. And now the widening we are seeing is now market pricing, the more political risk discount, the fiscal discount on top of it.
So it will be very hard to get another, let's say, 35 basis point of widening because we already have that in the spreads already. So the only way we can get that type of magnitude, as I mentioned before, you have to get this, let's say, the left wing sort of government scenarios or as I mentioned, like a very implausible scenario of like Macron resigning. Those type of, let's say, political surprises or fiscal risks have to be getting repriced and spread to get that type of move now.
So, Meera, given what we discussed on the rates and the scenarios, like what are the implications for the FX markets and specifically for EURUSD? Yeah, I think on EURUSD, it's been a challenging couple of months, not because it's done anything wrong. I mean, we've kind of stayed in a range, except, you know, we have gone down to 114 months before the last payroll number.
But overall, we have been relatively range bound. So nothing wrong happening here. It's just, you know, we're not breaking higher anymore, which I think in this market is making a lot of macro investors quite uncomfortable.
And as we outlined from this discussion from Raphael and yourself, the transmission to FX, I would usually think about it through the fiscal outcomes, fiscal slippage, what could the impact on peripheral spreads be, you know, OAT bond spreads. As a general rule of thumb, every 10 basis points of spread, widening is worth around half a percent to three quarters of a percent on EURUSD. So, you know, it seems to me that given the widening we've seen so far, getting half a percent or so weakening in EURUSD is very reasonable.
If we get another 10, 15 basis points, could we get to, you know, another half or another one percent? Sure. But I think given all the discussion that we've had around how the fiscal consolidation stays on path, the only difference is the only difference is that we see a tighter policy.
You know, it's the magnitude. That's really what's going to be ultimately the, you know, the important thing here. So and that's going to keep the fallout on EURUSD pretty limited.
So at most in our scenarios with either out in relative or absolute majority, I don't expect more than half a percent or one percent change weakening in EURUSD and I do expect that to be faded as well. At the end of the day, the bigger driver for the EURUSD move has been, you know, U.S. moderation, market concerns on Fed independence, European fiscal spend. None of that is actually being challenged here.
The European growth data, the sentiment measures continue to improve. So and we don't really expect this issue to become systemic in the region either. So overall, you know, I do think that this is not great because if people have low conviction on FX, it's yet another thing to monitor.
But equally, it's not something that's derailing the view either. And ultimately, what will matter is what's that next payroll in the U.S.? What happens with Fed independence?
What happens to U.S. data and the Fed reaction function? And all of that is keeping us pretty bullish on EURUSD. I mean, one thing I'll say is the local growth data is still improving.
To me, that's like the ultimate litmus test here. And secondly, real yields are still moving in favor of euro. So where we saw the fair value of EURUSD was 109 in June.
That's gone up to 116 if I look at just the real yields, fair value measures. So actually, positioning and valuation measures are substantially healthier for euro. And I would say that, you know, outside of, you know, outside of purely euro dollar, it's the euro crosses that like euro Swiss that could be better vehicles if French threats continue to widen.
But, you know, let's stop there. Please take a look at our public our website for more information on our published research. This communication is provided for information purposes only.
Please refer to JPMorgan Research Reports related to its content for more information, including important disclosures. 2025 JPMorgan Chase & Company All Rights Reserved. This episode was recorded on August 28, 25.