EUR/USD falls on French political risk and Trump’s defence of the Dollar

• EUR/USD declines on Monday as the French government faces a potential vote of no confidence. 
• The US Dollar strengthens due to Donald Trump’s threat to hit BRICS countries with 100% tariffs. 
• Dovish commentary from ECB’s Martin Kazaks adds to the negative sentiment around the Euro.

EUR/USD is trading over half a percent lower on Monday, with a single Euro (EUR) buying about 1.0500 US Dollars (USD) as New York awakes to the sound of alarm clocks and scent of coffee. 

The pair is falling as a political crisis threatens to overturn the French government, weighing on the Euro whilst President-elect Donald Trump gives the Dollar a boost by threatening to impose tariffs on BRICS nations unless they give up their search for an alternative to the Dollar. 

The Single Currency is depreciating as France faces a political crisis of a gravity not seen since 1962. Michel Barnier’s minority government could face a vote of no confidence as attempts to get a controversial Budget through parliament. 

Due to lacking an overall majority, Barnier relies on the backing of the French Far right National Rally (NR) party but they have demanded major concessions to the Budget, curbing the austerity of the original plan which sought to reign in government spending and narrow the country’s relatively wide deficit. 

Barnier has until Monday to yield to NR's demands or face the possibility of a no-confidence motion toppling his government.

The panic is leading international investors to steer clear of European equities, reducing demand for the Euro, according to Reuters. This, in turn, is weighing on EUR/USD. 

The US Dollar meanwhile, is rallying across the board after Donald Trump threatened the BRICS trading bloc with 100% tariffs unless it dropped the pursuit of a replacement currency.

BRICS – which includes Brazil, Russia, India, China, South Africa, Egypt, Iran, the United Arab Emirates, and Ethiopia – has been steadily reducing its reliance on the USD as a medium of exchange, using the currencies of its members instead, whilst mulling an alternative reserve currency of its own. 

“The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER,” Trump posted on Truth Social on Saturday afternoon. “We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty US Dollar or, they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy,” he added.  

EUR/USD faces further downside pressure after comments from European Central Bank governing council member Martins Kazaks on Monday, suggested he was in favor of making further cuts to Eurozone interest rates. 

“In my view, rate cuts must continue,” said Kazaks, adding, “we see that the inflation problem will soon end.” 

The expectation of lower interest rates is negative for the Euro since it reduces foreign capital inflows.