Insights 
VT 
The euro is unlikely to experience a rebound unless there is negative news from the US, such as macroeconomic changes or tariffs. Uncertainty in French politics is also affecting the euro’s potential recovery.
French Prime Minister Lecornu is addressing parliament regarding a budget proposal, which is critical for his political standing amidst an upcoming no-confidence vote. A government collapse could prevent the euro from benefiting from any US-China trade escalation.
In Germany, the ZEW survey is expected to show some improvement in economic expectations and the current situation. However, this is not likely to have a strong impact on the euro at present.
The FXStreet Insights Team compiles market observations from experts to provide insights into current economic conditions and potential currency movements.
French political uncertainty is the main factor weighing on the euro. We see any potential for a rebound as highly unlikely until we get some clarity, particularly with a no-confidence vote expected this Thursday. The market is clearly nervous, so traders should remain cautious about any euro strength.
This anxiety is visible in the bond market, where the spread between French 10-year OATs and German Bunds has widened to 85 basis points, a level not seen since the last sovereign debt scare. One-week implied volatility in EUR/USD has also jumped to 12.5%, showing that options traders are pricing in a significant move around the vote. Expect to pay higher premiums for short-term options.
Even if the growing trade friction between the US and China were to weaken the dollar, we doubt the euro could rally. The internal political risk in France is too significant for investors to overlook, effectively turning the euro into a funding currency for other trades. We believe selling into any small rallies is the preferred approach for now.
We have seen this pattern before, particularly in the lead-up to the 2017 French presidential election. During that period, political risk kept the euro suppressed for months until the market was certain of the outcome. A similar dynamic appears to be unfolding now, preventing any sustained upward momentum.
Should the French government collapse later this week, any benefits from a wider US-China dispute will be missed. Conversely, if US tariff risks de-escalate without a corresponding positive surprise from Paris, EUR/USD will likely target the 1.150 level. Buying euro puts or setting up bearish option structures offers a way to position for this downside risk.
