07:08 AM EDT, 10/07/2025 (MT Newswires) -- The euro (EUR) has underperformed at the start of this week alongside the yen (JPY), said MUFG.

It has resulted in EUR/USD falling to an intra-day low on Monday of 1.1652, wrote the bank in a note to clients. The euro has been undermined by the pick-up in political uncertainty in France and renewed concerns over fiscal and economic outlook.

The sharp euro sell-off on Monday was triggered by the decision from French Prime Minister Sebastien Lecornu to resign. However, he has since agreed to at least temporarily revoke his resignation after discussions with President Emmanuel Macron.

Lecornu posted on social media that "at the request of the President of the Republic, I have agreed to hold final discussions with the political forces for the sake of the country's stability. It will tell the Head of State on Wednesday evening whether this is possible or not, so that he can draw all the necessary conclusions."

However, it still appears unlikely that Lecornu will be able to reach an agreement in time, stated MUFG. The largely unchanged cabinet appointed over the weekend has made an agreement even more challenging. Prime Minister Lecornu's plans for only a slightly target for the next year budget deficit at 4.7% of gross domestic product, have also limited the room for compromise on fiscal policy.

As a result of the latest political developments, the government will struggle to meet the deadline to file a budget by next Monday, making it likely that emergency measures will be needed to avoid a shutdown in January, pointed out the bank.

If Lecornu is unable to reach an agreement by Wednesday and resigns, then it will leave President Macron with the option of choosing another prime minister or calling elections in an attempt to break the deadlock in parliament, added MUFG. One option would be to choose another technocrat PM to pass a budget for next year.

Downside risks for the euro would increase if parliamentary elections were called before the end of this year, extending the period of political uncertainty. It would make it less likely that EUR/USD would rise up to the bank's year-end target of 1.2000, although MUFG isn't convinced parliamentary elections would be sufficient on their own to trigger a sustained reversal of the strengthening trend for the euro that has been in place for most of this year.