06:40 AM EDT, 09/02/2025 (MT Newswires) -- The euro (EUR) is continuing to trade close to recent highs against the US dollar (USD) at around the 1.1700 level, said MUFG.

After a brief dip last week triggered in part by the pick-up in political uncertainty in France after Prime Minister Bayrou called a vote of confidence in his government to take place next Monday, the euro has quickly recovered lost ground, indicating that market participants aren't currently anticipating that political developments in France will be sufficient to derail the bullish trend, wrote the bank in a note.

Similar to last year, the French government is expected to lose another vote of confidence and then President Emmanuel Macron will have to either appoint a new prime minister to form a new government with the main aim to pass next year's Budget, or he now has the option to call parliamentary elections in an attempt to break the deadlock.

Snap elections would create more political uncertainty, stated MUFG. A defeat for the government next Monday would indicate that there is no majority in parliament currently in favor of significant fiscal tightening.

It appears more likely now that the budget deficit will remain higher for longer at over 5% of GDP, pointed out the bank.

Unless there is a significant tightening of financial conditions in the eurozone, which is unlikely to be triggered by developments in France, then the European Central Bank appears set to leave rates on hold at this month's policy meeting, added MUFG. With inflation back at its target, the ECB is becoming more confident that its easing cycle is close to an end.

Executive Board member Isabel Schnabel told Reuters on Tuesday that monetary policy "may be already mildly accommodative and therefore I do not see a reason for a further rate cut in the current situation." Schnabel added that there's a "very high bar" for more easing, and isn't concerned over the risk of inflation persistently undershooting the target after these "many years of too high inflation."

While MUFG is still sticking to its forecasts for further ECB easing in the year ahead, the bank acknowledges that there is a higher hurdle to justify further easing, given the ECB has already cut the policy rate in half.

In MUFG's latest monthly FX Outlook report released on Monday, the bank raised its forecasts for EUR/USD, lifting the Q2 2026 forecast up to 1.2500. It was mainly driven by the bank's outlook for a weaker US dollar on the back of Federal Reserve rate cuts and President Donald Trump's intensifying attacks on the Fed's independence.