06:20 AM EST, 11/22/2024 (MT Newswires) -- The movement in EUR/USD in October and November has been largely down the United States factors with Donald Trump's presidential election victory the dominant factor dragging EUR/USD down from around the 1.12000 level, said Mitsubishi UFG.

U.S. factors will remain important although there is evidence in the price action across the financial market that the 'Trump trade' has run out of steam for now and markets have reached a new equilibrium level that to a much greater degree factors in the risks associated with Trump's policies, wrote the bank in a note to clients.

However, there is a risk now that the euro could come under downward pressure from eurozone-specific factors with political uncertainty in France returning to the fore, stated MUFG. The OAT/Bund spread is creeping higher again and this week has jumped 6bps to trade at 78bps and back close again to the key 80bps level.

The risks began to emerge last week with France's parliament rejecting the revenue aspects of the budget in a vote -- 362 versus 192 -- which led Prime Minister Michel Barnier to suggest that the budget was probably going to have to be passed under Article 49.3 -- which effectively allows for the budget to by-pass parliament. That would inevitably prompt the Left Alliance to table a no-confidence motion in the government that risks seeing the government collapse and force President Emmanuel Macron to go through a process of finding another premier and government alliance, pointed out the bank.

The assumption since the last no-confidence motion -- when the far-right RN abstained -- is that Marine Le Pen's RN would avoid supporting no-confidence motions and so a degree of political stability would continue.

However, comments from RN members suggest this might not be the case, noted MUFG. RN's Jordan Bardella has stated that the government is running the risk and heading to the road of a vote of no confidence."

Le Pen stated on Wednesday that measures that hurt household incomes were a red line for her party and if crossed "we will vote for a censure." It is still unclear how this plays out and Le Pen will want to weigh up the consequences of bringing down the government with the benefits of RN as being seen as the responsible party that leaves her in a stronger position for winning the presidency in 2027.

MUFG's view has been that RN would avoid bringing down the government given the real prize in focus is the presidency but the risks have certainly increased that the view could be wrong.

The OAT/Bund spread also widened out due to additional supply with an auction on Thursday and a looming sovereign debt rating announcement by S&P next Friday. S&P cut France's rating to AA- on May 31.

A no-confidence vote could well take place at the end of the budget debate process scheduled for Dec. 12 but in the meantime, the increased risks could see the OAT/Bund spread widen through that key 80bps level which could well prompt another lurch lower for EUR/USD, added the bank.

French politics is certainly set to take on greater focus in the foreign exchange markets, according to MUFG.