Euro: Political risk weighs but downside seen limited – ABN AMRO

ABN AMRO strategist Georgette Boele notes that changes in interest rate spreads have encouraged speculative short Euro positions, while fiscal and political uncertainty in France and Spain has historically coincided with Euro (EUR) weakness versus the US Dollar (USD). Boele argues that much of this risk is already priced into French spreads and expects sentiment and EUR/USD to remain negative near term but without a continued sell-off.

Fiscal and political uncertainty hit euro

"Changes in interest rate spreads have encouraged speculative investors to take short euro and long dollar positions."

"The euro tends to weaken when government bond yields in a major eurozone country, or in several countries, rise sharply because of political and/or fiscal concerns. There was to some fear of contagion, and this impacts the currency as well."

"This suggests that periods of fiscal and political uncertainty in the eurozone often coincide with speculators holding net short euro positions and a lower EUR/USD. The graph below on the right shows the recent relationship between the ten-year French-German government bond spread and the euro."

"In last week’s FX Weekly, we said that political uncertainty would weigh on the euro towards the end of this year and in the first quarter of next year. This pressure has emerged sooner than we expected."

"For EUR/USD, sentiment may remain negative in the near term, but we do not expect the sell-off to continue. We therefore keep our end-2026 forecast unchanged at 1.15."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)