Euro Stabilizes as France Forces 2026 Budget; Bond Spreads Narrow

French Prime Minister Lecornu has invoked Article 49.3 to force the 2026 budget through, a move breaking legislative deadlock that has been cautiously welcomed by financial markets despite the looming risk of a no-confidence vote.

Markets Favor Fiscal Clarity

Despite criticisms regarding the democratic nature of the maneuver, investors reacted positively. The spread between French and German 10-year government bond yields tightened rapidly to 65 basis points, the lowest level since July.

This market reaction suggests that for Forex traders and bond investors, the risk of a budget crisis outweighed concerns over the legislative method.

Deficit Targets and Political Survival

The forced budget adheres to a fiscal deficit target of 5% of GDP for 2026, slightly higher than the initial 4.7% draft but viewed as realistic given the economic climate.

The immediate risk to the EUR now lies in the upcoming confidence vote. If Lecornu withstands the political backlash, a significant tailwind of uncertainty will be removed, potentially offering support to the EUR/USD pair.

• French-German Bond Spread: Tightened to 65 basis points, lowest since July
• Fiscal Deficit Target: Set at 5% of GDP for 2026
• Market Focus: Stabilization of EUR and potential upside for EUR/USD if government survives confidence vote.