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Talking Points

- The Italian budget deficit negotiations may be front and center, but civil unrest in Europe’s second largest economy is weighing on French bond markets, hurting the Euro[1].

- While Italian-German bond yield spreads have narrowed since mid-November and have stayed unchanged in December, French-German spreads have widened out, suggesting new political risk has been introduced to the Euro.

- Implicitly, the budgetary changes proposed by French President Emmanuel Macron will see the French budget deficit/GDP ratio go above 3%, a move only stands to complicate the European Commission’s budget negotiations with Italy.

See the DailyFX Economic Calendar[2] and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar[3].

Political risk has been emanating out of Europe for some time now. The derailment of the Brexit negotiations at the start of this week coupled with ongoing tension over the Italian budget have kept European politics front and center since at least the end of September. But as the latter of these two influences appeared to be coming to a head – both European Commission policymakers and Italian politicians seemed willing to find a middle ground – a new risk has been introduced, from France: the threat of a Emmanuel Macron’s presidency failing.

French-German Spreads Have Widened While Italian-German Spreads Have Not

The “gilet jaunes” or “yellow vest” protests have engulfed Paris, among other major cities, in riots for the past several weekends. Given that the cause was fiscal in nature – protestors were unhappy with a tax hike – markets have been keen to see how French President Macron would react. In response, a desperate

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