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Jun 19 - 12:55 AM

ING: Assessing EUR/USD Risk Premium Amid French Election

By eFXdata  —  Jun 18 - 04:30 PM

Synopsis:

ING estimates a current risk premium of 1.6% in EUR/USD due to concerns surrounding the upcoming French elections. This is a slight decrease from 2.4% at Friday's close, indicating that FX market concerns about French politics may have peaked temporarily. However, significant political risk remains, keeping the euro as a laggard in any USD-negative dynamics until the first round of the parliamentary vote on 30 June.

Key Points:

  1. Risk Premium in EUR/USD:

    • The short-term undervaluation in EUR/USD is currently estimated at 1.6%, down from 2.4%.
    • This suggests that FX market concerns about French politics may have reached a peak for now.
  2. Option Market Insights:

    • The EUR/USD 25-delta risk reversal has stabilized, but at -1.5, it remains the lowest since late 2022.
    • This indicates a persistent cautious sentiment in the options market regarding EUR/USD.
  3. Potential for Rebound:

    • If political risk premium scales back, there is substantial room for a rebound in EUR/USD.
    • However, such a rebound is unlikely before the first round of the French parliamentary elections on 30 June.
  4. EUR/USD Dynamics:

    • The euro is expected to remain a laggard in any USD-negative scenarios.
    • Political risks associated with the French elections are significant enough to keep the euro's recovery constrained.

Conclusion:

ING's analysis suggests that the risk premium in EUR/USD due to the French elections has temporarily peaked, with the potential for a rebound if political concerns ease. However, the euro is expected to remain under pressure until at least the first round of the French parliamentary elections on 30 June. The persistent cautious sentiment in the options market further supports this outlook, indicating that any significant recovery in EUR/USD is unlikely in the near term.

Source:
ING Research/Market Commentary

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