Euro selloff fades as France avoids need for snap election.
The euro recovered from recent lows against the pound and dollar as French leaders appear to be close to cobbling together a new government.
Reports say French President Emmanuel Macron will name a new prime minister by Friday evening, meaning there's no need to call a snap election, which minimises uncertainty.
Outgoing Premier Sebastien Lecornu - whose resignation on Monday triggered a selloff in the euro - said sufficient progress had been made to allow work to begin forming a new cabinet.
"GBP has been aggressively sold off," says Thanim Islam, Head of FX Analysis at Equals Mondy. "The GBPEUR move could also be down to French President Macron saying he will name a new PM by Friday evening."
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Above: GBP/EUR falls from its highs as French anxieties die down.
The euro fell sharply after Lecornu resigned on Monday, but he now notes there are possibilities for a compromise in parliament, meaning a worst-case outcome of a new snap election can be avoided.
"The government crisis in France appears to have been resolved for the time being, as the resigned Prime Minister Lecornu has finally managed to resolve the crisis and forge a coalition government," says Ralf Umlauf, economist at Helaba Bank.
Lecornu is meanwhile said to be optimistic that a budget can be passed by the end of the year, meaning there is some scope for France to begin whittling down its growing budget deficit.
These developments are enough to help bring the euro off recent floors: the euro to pound is higher at 0.8682, having been as low as 0.8656 on Wednesday. This gives a pound to euro at 1.1514, down from 1.1548.
The euro-dollar is at 1.1637, up from 1.1598.
"The situation in France may have little impact on the euro," says Antje Praefcke, Commerzbank.
Concerns about France's debt trajectory were made evident in a selloff in government debt and the euro on Monday after the resignation of Lecomu after just 27 days in office.
"Lecomu’s resignation confirms that French bonds remain uninvestable," says Mathieu Savary, BCA Research’s Chief Strategist of Developed Markets ex-US.
"As long as there’s no majority in parliament, no one will be able to tackle France’s debt and fiscal problems. The problem is that dealing with this issue will most likely demand a full-blown crisis in the OAT market to discipline French politicians," he warns.
However, Praefcke points out that investors do not necessarily have to buy OATs (Frencch bonds) and can fall back on German government bonds as a safe haven.
"Furthermore, the ECB would most likely be ready to step in if the spreads widened too much, counteracting this with asset purchases," she explains.
With concerns about France fading, the euro can potentially recover some recently lost ground.
However, looking ahead, the prospect of the euro breaking to new highs against the euro and dollar looks diminished.
"Developments in the political situation in France could become a latent burden on the euro in the medium term," says Praefcke, who sees France as an example of why the Eurozone will struggle to progress towards issuing joint debt.
Recent data out of Germany meanwhile suggests the economy is slowing down again, which will dent the currency's ability to strengthen.