06:52 AM EDT, 10/10/2024 (MT Newswires) -- The hawkish repricing of United States Federal Reserve rate cut expectations has weighed on EUR/USD and helped to drag it this week back below support at the 1.1000 level, said Mitsubishi UFG.

It stands in contrast to market expectations for the European Central Bank to speed up the pace of rate cuts at next week's policy meeting, noted MUFG.

Bank of France Governor Francois Villeroy de Galhau stated Wednesday that "a drop is very likely, and that it will not be the last". At the same time, he talked down the possibility of the ECB delivering larger rate cuts than 25bps. Villeroy stated that "we have gotten into the habit of acting gradually, that is to say resolutely, but without taking big steps."

The comments support eurozone rate market expectations for the ECB to deliver a back-to-back 25bps rate cut next week and to keep lowering rates in 25bps increments at least through into the middle of next year which would lower the policy rate closer to neutral territory at around 2.00%, stated the bank.

The market is also waiting for further budget details from the new French government, pointed out MUFG. Prime Minister Michel Barnier's government survived its first no-confidence motion in the National Assembly a couple of days ago. The left-win New Popular Front coalition promoted the motion, but it received only 197 votes in favor which was well below the 289 votes required to pass.

Premier Barnier's government survived primarily due to the abstention of the right-wing National Rally party. The developments suggest that the National Rally party is unlikely to vote to bring down the government during the budget process.

Barnier has already outlined the government's plan to bring the budget deficit down from around 6% of gross domestic product this year to closer to 5% next year. That would require a reduction of about 30 billion euros. The French prime minister also outlined his plan to delay by two years to 2029 bringing the budget deficit below 3% of GDP. France must submit a fiscal plan to the European Commission by Oct. 31.

The plan is expected to meet European Union fiscal rules by bringing the deficit below 3% within the adjustment period while being consistent with the minimum adjustment of 0.5 percentage point per year, wrote the bank in a note to clients. One of the main risks to the government's plans for fiscal consolidation would be if growth next year comes in much under the 1% expected at the moment.

Higher taxes could act as damper on the growth outlook. So far the fiscal developments in France have had limited negative impact on euro performance, added the bank. The spread between 10-year French and German government bonds would need to "significantly" widen out beyond recent highs at around 80bps to weigh more on the euro, MUFG said.

One potential risk is if Fitch's review of France's credit rating on Friday results in a downgrade, said MUFG, which is expecting the credit rating to be confirmed, but for it to be put on negative watch. A downgrade can't be ruled out, MUFG said.