Why the EUR/USD Remains Attractive Despite French Political Volatility

The EUR/USD pair has defied conventional wisdom in 2025, maintaining a compelling case for investors despite the Eurozone’s political turbulence, particularly in France. This resilience stems from a confluence of structural strengths in the Eurozone, strategic ECB interventions, and a weakening U.S. dollar narrative. While France’s political crisis has rattled markets, the Eurozone’s broader fundamentals and institutional safeguards have insulated the euro from systemic contagion, making the EUR/USD a standout opportunity in a fragmented global landscape.

Eurozone Fundamentals: A Foundation of Stability

Goldman Sachs Research underscores that the Eurozone’s 2025 growth trajectory, though modest, is underpinned by a unique combination of fiscal and monetary tailwinds. Defense and infrastructure spending, particularly in Germany, are projected to lift growth to near-potential levels by mid-2025, with defense expenditure reaching 3% of GDP by 2027 [1]. This spending surge, coupled with lower energy prices and stabilizing inflation (now near 2%), creates a self-reinforcing cycle of demand and confidence [2]. Unlike previous crises, the Eurozone’s fiscal reforms—such as improved competitiveness in peripheral economies—have reduced the risk of fragmentation, even as France’s OAT-Bund spread widens to 79 basis points [3].

ECB Policy: A Balancing Act

The European Central Bank’s (ECB) 2.0% deposit rate and paused rate-cutting cycle reflect a cautious approach to preserving the euro’s strength [2]. While inflation has eased to target levels, the ECB’s Transmission Protection Instrument (TPI) remains a critical backstop against market fragmentation. Analysts note that the TPI is unlikely to be directly activated in France due to its ongoing fiscal non-compliance but could be deployed indirectly to stabilize peripheral markets like Italy and Spain if spillover risks emerge [4]. This layered approach ensures the euro remains a safe-haven asset, even amid localized volatility.

France’s Limited Spillover: Institutional Resilience

France’s political crisis, marked by a looming confidence vote and a 5.4% budget deficit, has raised eyebrows. However, the Eurozone’s institutional architecture—bolstered by fiscal reforms and the ECB’s TPI—has curtailed contagion risks. For instance, the Eurozone’s core economies (Germany, the Netherlands) have offset France’s fragility, while the OAT-Bund spread remains below levels seen during the 2024 snap elections [3]. Investors are also reassured by the ECB’s readiness to act, even if indirectly, to prevent a domino effect in sovereign debt markets [4].

Dollar Dynamics: A Weakening Anchor

Contrasting the Eurozone’s stability is the U.S. dollar’s relative fragility. The Federal Reserve’s dovish pivot, driven by contained inflation and the need to stimulate growth, has weakened the dollar’s appeal. Goldman Sachs forecasts a narrowing policy divergence between the ECB and Fed, with the euro potentially strengthening to 1.16 by Q3 2025 [2]. Meanwhile, dollar-denominated assets face pressure as global investors rotate into euros, leveraging the Eurozone’s improved fiscal outlook and the ECB’s inflation-targeting credibility.

Conclusion: Strategic Resilience in Action

The EUR/USD’s attractiveness lies in its ability to harness Eurozone resilience while sidestepping the pitfalls of political volatility. France’s crisis, though disruptive, has not derailed the euro’s trajectory due to robust institutional frameworks and a recalibrated ECB. As the Fed’s rate-cutting cycle gains momentum, the EUR/USD is poised to benefit from a widening policy gap, making it a strategic bet for investors seeking both safety and growth.

Source:
[1] Goldman Sachs Research, Euro Area Outlook 2025: Under Pressure [https://www.goldmansachs.com/insights/goldman-sachs-research/euro-area-outlook-2025-under-pressure]
[2] Market Know-How 3Q 2025 [https://am.gs.com/en-us/advisors/insights/article/market-know-how]
[3] Eurozone economic mood slips: French political crisis adds to worries [https://www.euronews.com/business/2025/08/28/eurozone-economic-mood-slips-french-political-crisis-adds-to-worries]
[4] France's Political and Fiscal Turmoil: Implications for Eurozone Stability and Sovereign Debt Markets [https://www.ainvest.com/news/france-political-fiscal-turmoil-implications-eurozone-stability-sovereign-debt-markets-2508/]