Are FX markets being complacent on Euro?
9 JUL, 2024
By Thomas Hempell from Generali Investments
The announcement of French snap elections rattled markets in June, with French OAT spreads over Bunds temporarily soaring to above 80bp from 50bp and the CAC40 selling off >6%. The FX response proved more muted. The EUR temporarily lost a bit more than 1% vs. USD and almost 2% vs. CHF. But with 1st-round results easing market worries of RN gaining a full majority of seats the EUR staged a swift recovery. This morning, the EUR is trading at similar levels as before the European elections. EUR/USD risk reversals –which reflect relative costs of insuring against a move in either way –have pared most of their EUR worries (left chart).
The EUR’s neglect of tighter EGB risk premia early in the year may have helped to cushion the adverse impact of new euro area worries into the elections (right chart). But we suspect that markets also underestimate the headwinds from French stalemate for fiscal policy and much needed reforms at the European level. The EUR/USD has also taken the risen odds of a (dollar bullish) Trump victory after Biden’s TV debacle in a stride. Overall, we sense some market complacency regarding policy risks, raising the odds of a renewed setback of the EUR.
