Insights 
VT 
The French Prime Minister faced a setback after losing a confidence vote in the national assembly, leading to the search for a replacement. President Macron is tasked with finding a new Prime Minister acceptable to the various factions in power, failing which an election may be required.
Amid this political uncertainty, Fitch is set to review France’s sovereign rating on Friday. Despite the ongoing turmoil, the euro showed resilience and remained steady, with the EUR/USD exchange rate around 1.1770.
Risk Assessment
With Fitch’s review of France’s sovereign rating this Friday, we need to anticipate increased volatility. The spread between French 10-year government bonds and German Bunds is the key indicator, and it’s already widening towards the 75 basis point level we saw during similar political stress back in 2024. This suggests traders are already pricing in higher risk ahead of the decision.
The euro’s strength seems disconnected from the political risks brewing in Europe’s second-largest economy. Implied volatility on one-month EUR/USD options has remained low, recently hovering around 6.2%, which makes buying downside protection relatively inexpensive. We should consider purchasing euro put options to hedge against a negative surprise from either the political arena or the Fitch rating announcement.
We have to remember that Fitch already downgraded France’s rating to AA- in April 2023, citing high government debt and political gridlock as key reasons. France’s debt-to-GDP ratio has since struggled to fall below 110%, and the current political instability only amplifies these long-standing fiscal concerns. Another downgrade or even a negative outlook is a very real possibility.
Market Strategies Amid Uncertainty
The market’s complacency could also set the stage for a sharp relief rally if President Macron manages to appoint a market-friendly Prime Minister. Given the binary risk of either a sell-off or a rally, structuring trades that profit from a large move in either direction, such as a long straddle on the CAC 40 index, is a sensible strategy. This positions us to capitalize on the uncertainty itself, rather than betting on a specific outcome.
