06:43 AM EST, 12/05/2024 (MT Newswires) -- The euro held up well early on Thursday following the collapse of the French government, said Mitsubishi UFG.

EUR/USD was back closer to 1.0500 following the no confidence vote in the French parliament on Wednesday, but failed to break below and has since risen back to levels seen before the vote at around 1.0540, wrote the bank in a note to clients.

The limited euro sell-off shows that markets had anticipated the vote, stated MUFG. French President Emmanuel Macron is scheduled to make a statement at 8 p.m. CET on Thursday, and will now be tasked with appointing a new premier.

The no confidence vote could open the door to a technocratic government being put in place until new parliamentary elections can be held next year, according to the bank. The earliest date they can be held is in July.

With the current government's budget for next year also rejected, an emergency budget would need to be passed, pointed out MUFG. With the fiscal consolidation measures being implemented, the budget deficit could rise further above 6% of gross domestic product.

The French government bond market has moved to price in a higher fiscal risk premium to reflect the deteriorating budget outlook, added MUFG. The 10-year yield spread between French and German government bonds has widened by around 10bps over the past month hitting the highest level since the eurozone debt crisis in 2012.

However, there has been little evidence of contagion within other eurozone government bond markets so far which is another reason why the negative euro reaction has been muted, according to the bank. The 10-year yield spread between Italian and German government bonds has even narrowed further indicating that Italian bonds are initially benefitting from the shift away from French bonds.