Euro and Pound Rise Despite UK, France Political Crisis

The EURUSD and GBPUSD advanced on Monday, 08 Sep, despite rising political uncertainty in Europe.

In France, Prime Minister Francois Bayrou lost a vote of confidence on Monday, while in the UK, the resignation of Deputy PM Angela Rayner on Friday sparked a reshuffle in Prime Minister Keir Starmer's cabinet.

A weaker Dollar (DX) supported both Forex pairs amid a more dovish post-NFP environment for the Fed. 

TL;DR

• French PM Bayrou lost a confidence vote after his budget aimed for €44 billion in savings.

• Macron must quickly find a new PM, as France faces protests, a credit review, and ongoing debt worries.

• Deputy PM Rayner resigned over a tax issue, triggering a major cabinet reshuffle.

• Starmer promoted trusted ministers to key roles, especially those tied to Reeves’ budget.

• Rising UK debt costs and gilt yields add pressure ahead of Reeves’ budget.

• Speculation about Reeves’ future remains, but replacing her is seen as risky.

France’s Political Crisis Could Affect Euro Trading

French PM Bayrou, the fourth PM to go in a span of four years, lost a confidence vote on Monday after a short nine months in office (364 against vs 194 for). Macron appointed Bayrou after the Brexit negotiator for the EU, Michel Barnier, who was appointed by Macron after the snap election he called following the European Parliament vote in 2024, had a similar fate as France’s PM last December.

Why was France’s PM Francois Bayrou Ousted?

The French government has been facing an ageing population, which has led to more borrowing to cover budgetary needs. Public debt in early 2025 stood at 114% of GDP at €3.36 trillion, which is the equivalent of €50K per citizen, with a deficit twice the EU’s limit at 3.0%. The centre-right politician provoked French lawmakers after seeking to pass a 2026 budget of a substantial €44 billion in savings, which resulted in him calling for a vote of confidence in himself after receiving an outcry from the opposition. (Source: Reuters)

French React to Austerity Budget Proposal

Only 24% of the public believed Bayrou’s budget would be effective in reducing the deficit, as his budget included freezing welfare payments and pensions, and deep cuts to public services. The most controversial measure was the proposal to convert two Easter Mondays and VE Day into unpaid working days to boost productivity.

Who Are The Potential Successors of the French PM?

Following the vote, pressure builds on Macron to find a successor fast from the left despite calls for holding another snap election. Possible candidates include Oliver Faure of the National Assembly, former PM Bernard Cazeneuve, and Cour des Comptes veteran Pierre Moscovici. To the centre–right, one choice is Defence Minister Sebastiaen Lecornu of Macron’s own Renaissance Party.

Despite faring quite steadily for the time being, the Euro and French bond markets might come under renewed pressure.

Cable Little Moved Following Rayner Resignation

In the UK, Starmer had to bring in Foreign Minister David Lammy as Deputy, then replace him and his successor in a temporary cabinet reshuffle after the sudden resignation of Rayner, over failure to pay the correct tax. 

UK Cabinet Changes Affecting Economic Policy

Starmer aimed to restore his authority and stabilise his government after a period of damaging speculation and internal instability. The entire reshuffle affected around half the cabinet, involving many of the most senior positions in government.

Starmer had just reshaped his team on 1 September, appointing Minouche Shafik as his economic adviser and bringing in Downing Street Reeves’ former Deputy Darren Jones ahead of a critical Budget for Rachel Reeves later this year.

Strategic Appointments Ahead of Reeves’ Budget

Starmer’s appointments were designed to put “fixers and doers” in charge of troubled departments aimed at fulfilling key policy promises and recovering public confidence. Notably, some of the reshuffling placed trusted ministers in charge of departments central to Reeves’ budget. Specifically:

• Welfare and Skills: With Pat McFadden now overseeing a combined Work, Pensions, and Skills department, there is potential for controlling public finances and finding savings or redirecting funds.

• Business and Growth: Peter Kyle’s move to Business Secretary signals a focus on economic growth, which Reeves needs to boost tax revenues and reduce the deficit. 

• Housing and Infrastructure: Steve Reed, as Housing Secretary, is now in charge of delivering on Labour’s ambitious housing targets, possibly with new funding streams.

• Science and Innovation: Liz Kendall’s move to Science Secretary aligns with Labour’s growth agenda, as investment in innovation is seen as a driver of future prosperity and tax receipts.

• Environment: Emma Reynolds will have to balance green investment with fiscal discipline, a key challenge as Reeves faces pressure to deliver on climate promises without overspending.

Reeves faced increased scrutiny as the UK government spent over $100 billion in interest on debt, with UK yields also rising. 

Gilt Yields React to UK Political Risks

The long-term gilt yield spiked to its highest levels since 1998 last Tuesday, which sent the pound tumbling over $0.15 against the Dollar. It followed the appointment of Shafik on 1 September, and the poaching of Darren Jones as Reeves’ Deputy, which revived concerns of a potential Reeves replacement with a left-leaning member, and led to another reshuffle following Raymer’s departure. 

Sterling moved slightly on Friday, as rumours that Reeves would be on the way out dissipated. However, the long-term gilt yield soared to a 27-year high as fears of tax increases in November remain, potentially breaking the Reeves manifesto pledges. 

What’s Next for European Markets

France is facing rising political uncertainty and nationwide protests, with a critical credit review by Fitch Ratings on 12 September, with the current rating at AA-, negative. However, without a correct appointment, pressure on Macron to resign ahead of his term in April 2027 might increase and pressure on European yield spreads. The French CAC 40 (FCE) traded higher early Tuesday, 09 September, as the event was largely priced in, but France’s budget deficit cannot simply disappear into the abyss even with a quick PM replacement.

In the UK, the gilt yield rise still hints at a possible replacement of Reeves, especially after moving in Reeves’ number two, Jones, into Downing Street. A potential replacement is Pat MacFadden. Still, some believe that Reeves will remain, as it would otherwise be a political suicide for Starmer. This, however, is unlikely to take the pressure off the UK’s fiscal issues. But on the other hand, when it comes to the pound, expectations of a weaker Dollar have analysts at MUFG projecting cable at $1.40 by mid–2026.

*Past performance does not indicate future results.