S&P Global has downgraded France’s credit rating from AA- to A+ due to ongoing budget uncertainty, despite France presenting a 2025 draft budget. This downgrade comes shortly after similar downgrades by Fitch and DBRS, marking a loss of the AA- rating at two major credit agencies in just over a month.

France’s political scene saw turbulence as Prime Minister Sebastien Lecornu narrowly survived two no-confidence votes, compromising on the 2023 pension reform to retain power. At present, the EUR/USD exchange rate is modestly up by 0.07%, trading at 1.1660.

The Euro’s Influence

The Euro, used by 19 EU countries, is the world’s second most traded currency, accounting for 31% of foreign exchange transactions in 2022. The ECB manages monetary policy for the Eurozone, using interest rates to control inflation and stimulate growth.

Key economic metrics like inflation, GDP, and trade balance heavily influence the Euro’s value. Rising inflation can prompt the ECB to increase interest rates, benefiting the Euro. In addition, a healthy economy and a favourable trade balance can drive foreign investment and strengthen the currency.

Looking back, the S&P downgrade of France’s credit rating was a key turning point for sentiment in the Eurozone. We are now seeing the fallout from that political turmoil and the reversal of the 2023 pension reform. That budget uncertainty has not gone away and continues to weigh on the market.

This political risk is now clearly visible in the government bond market. The spread between 10-year French OATs and German Bunds has widened to over 60 basis points, its highest level since the sovereign debt crisis. This shows that investors are demanding a higher premium to hold French debt, a direct consequence of the fiscal concerns highlighted by the downgrade.

Economic Outlook and Trading Strategies

Recent economic data confirms a slowdown, which should guide our trading strategies. The latest flash Eurozone PMI composite reading for October 2025 came in at 49.1, signaling a contraction driven largely by weakness in France and Germany. This weak growth complicates the European Central Bank’s policy path.

The ECB is in a difficult position as we look toward its next meeting. Eurozone HICP inflation for September printed at a sticky 2.7%, still well above the 2% target, but the weak growth data makes further rate hikes unlikely. The market is now only pricing in a 15% chance of another hike this year, down from over 50% just two months ago.

Given this uncertainty, we should expect volatility in the EUR/USD to rise in the coming weeks. Implied volatility on one-month options has already climbed from 7% to 8.5% over the last ten days. Traders should consider buying straddles or strangles to profit from a potential sharp move in either direction as the market digests the conflicting inflation and growth signals.

The path of least resistance for the Euro appears to be lower, especially against the US dollar. With the Federal Reserve signaling a “higher for longer” policy stance, the interest rate differential continues to favor the dollar. We can express this view by buying EUR/USD put options or establishing short positions in futures contracts, targeting a move below the 1.1400 support level.

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