Nomura’s FX strategists said recent gains by AfD in German regional elections have so far had little impact on EUR/USD, with markets treating the outcome as a local event and seeing limited spillover into national politics. They said the pair continues to find support from a relatively hawkish European Central Bank (ECB), softer US exceptionalism and improving euro area portfolio flows, while adding that politics in Germany and France remain a downside risk, with Italy a lesser concern.
They argued that clearer negative implications for the euro would emerge only if AfD’s regional momentum translated into a concrete national shift, such as early elections, with the party positioned to become the largest in parliament and a risk premium starting to build. They also said the weekend’s result broadly matched polling, which helped mute the market response, but warned that further regional gains could prompt closer scrutiny. Nomura said it remains long EUR/USD, and added that positioning remains marginally short EUR across a range of measures.
EUR/USD Support Amid Political Uncertainty
We recommend derivative traders maintain a bullish bias on EUR/USD over the coming weeks, as the pair remains fundamentally supported despite recent political noise in Europe. While the right-wing AfD party has made notable gains in recent German state elections, the foreign exchange market has largely shrugged this off as a localized issue. For now, we see the euro holding steady near the 1.10 to 1.12 range, supported by solid capital inflows into the eurozone.
The primary driver of this upward momentum is a relatively hawkish European Central Bank compared to a softening Federal Reserve. With the Fed cutting interest rates to support a cooling US economy, the yield spread between 10-year US Treasuries and German Bunds has narrowed toward 140 basis points, its lowest gap in over a year. This shifting rate differential makes the euro increasingly attractive, especially as portfolio flows into European equities have hit a multi-month high.
Options Strategies and Risk Management
To capture this trend, we suggest traders utilize EUR/USD call options, specifically targeting the 1.13 strike level with one-to-two-month expiries. Buying call options allows us to participate in the euro’s upside while strictly limiting our risk if political tensions suddenly escalate. Historically, implied volatility for EUR/USD rises ahead of major political shifts, making current low volatility levels an affordable entry point for option buyers.
However, we must remain highly alert to national political developments in Germany and France, which represent the main downside risks to this view. If state-level instability begins to threaten Chancellor Merz’s federal coalition or triggers talk of early national elections, a negative risk premium will quickly be priced into the euro. To hedge against this tail risk, we advise holding cheap, out-of-the-money EUR/USD put options around the 1.08 level.
