The Euro strengthened on Thursday, despite the anticipated collapse of the French government.
At the time of writing, it rose by 0.16% to $1.0525, staying close to the two-year low of $1.0332 reached at the end of November, as traders prepared for a prolonged crisis in France.
On Wednesday evening, French lawmakers approved a no-confidence vote against the government, plunging the country further into a crisis that jeopardises its ability to address a significant budget deficit.
The risk premium for holding French debt compared to German debt has surged to near its highest level since 2012, Reuters reports.
The single currency was able to increase despite the uncertainty, as the collapse of the government had already been priced into the market, explained Lee Hardman, senior currency analyst at MUFG.
“The contagion outside of French markets is fairly limited. If you look at the spreads between (German and) Italian and Spanish bonds they've actually been falling, so it's not spilling over into European markets and that limits the implications for the European economy,” he commented.
Traders are almost certain that the European Central Bank will reduce rates next week, with expectations of approximately 157 basis points of easing by the end of 2025.
Meanwhile, the Dollar index, measuring the currency against six major peers, edged down to 106.18.
The British Pound rose by 0.15% to $1.2721, while the Australian Dollar remained unchanged at $0.6431, following a 0.9% decline in the previous session due to disappointing data.
On Wednesday, Federal Reserve Chair Jerome Powell stated that the US economy is performing better than the central bank had anticipated when it began lowering rates in September. He also seemed to indicate his backing for a more gradual pace of rate cuts moving forward.
Expectations for Fed rate cuts remained largely unchanged, possibly due to weaker-than-expected services sector data released on Wednesday. Markets are currently pricing in a 74% likelihood of a 25-basis-point rate cut later this month.
All eyes will be on Friday's US non-farm payrolls report for November, which is anticipated to reveal the addition of 200,000 jobs, according to a Reuters survey. This comes after only 12,000 jobs were added in October, the smallest increase since December 2020.