07:13 AM EDT, 08/26/2025 (MT Newswires) -- One of the main developments at the start of this week has been the announcement by French Prime Minister Francois Bayrou that he has agreed with President Emmanuel Macron to call parliament back into session early to allow the government to present its budget plan and hold a confidence motion, said MUFG.

Prime Minister Bayrou noted that "yes it's a risk, but the supreme risk is doing nothing...there's no getting out of this situation if we are not brave."

The government is facing pushback against its plans for 44 billion euros of spending cuts and tax rises, including abolishing two of France's public holidays, wrote the bank in a note to clients.

The far-left France Unbowed party, the Green party and the far-right National Rally have all said they will vote to overturn the government, while the Socialist party has said it won't support a vote of confidence. According to Bloomberg, should the parties that have announced their opposition to supporting a confidence motion follow through with votes against it on Sept. 8, that would be sufficient to force Prime Minister Bayrou to submit his government's resignation.

The unfavorable domestic political developments could put a dampener on investor sentiment towards the euro (EUR) in the near term, stated MUFG.

The negative impact is already more evident in the French government bond market, where the 10-year yield spread for French over German government bonds has re-widened back towards 80bps after trading closer to 65bps in early August, pointed out the bank. Over the last year, the spread peaked out just below 90bps during the previous Budget negotiations in November.

The euro also weakened during this period, falling below 1.0500, although the main driver at the time was the initial fallout from the United States' presidential victory for Donald Trump that encouraged a stronger US dollar (USD), added MUFG.

On this occasion, the bank isn't convinced French political uncertainty will be sufficient on its own to lower EUR/USD if the US dollar is weakening in response to Federal Reserve policy easing and the threat to the Fed's independence.