French election poses downside risks for the Euro (EUR). The uncertainty surrounding this election is high given the rapidly-shifting polls and two-step voting process where results between rounds can swing massively. OAT-Bund spreads have widened to levels last seen in 2017 and European stocks have collapsed, TDS strategists note.

European politics imply scope for further Euro downside

“In case of a hung parliament, domestic policies will be hard to pass and this opens the door to another election cycle next year. An outright majority by Le Pen's RN can keep the risk premium in the EUR intact from bigger spending goals and a more constrained relationship with the EU.”

“Growth convergence with US might not be able to save the EUR. The political fabric of EU is becoming strained and making it harder to address bigger issues like energy crises, tech and industrial changes, and management of alliances with US/ China. French gridlock or worse a more Euro-skeptic government could weigh on the economic outlook and the EUR.”

“We remain bearish EUR vs USD, GBP, CHF. We remain USD bulls on three pillars - growth/ inflation exceptionalism and rising geopolitical risks. The USD remains the best global hedge. In RV, we like EUR/GBP downside as a Labour win in the UK with prospects of greater integration with EU can help price out the Brexit premium. Our quant macro framework is also bearish EUR.”