Researchers at MUFG Bank have highlighted that the Euro currently carries a risk premium of around 1.0% due to uncertainties surrounding the upcoming French election. This means that political uncertainty has caused the Euro to be undervalued compared to its usual drivers, such as economic data.
While concerns about the RN party’s influence in France have eased somewhat recently, the issue continues to weigh on the Euro. Derek Halpenny, Head of Research for Global Markets at MUFG Bank Ltd., noted that the elevated political risks in Europe are holding back the Euro’s potential for a rebound.
The Euro to Dollar exchange rate dropped to 1.0667 last week following President Macron’s announcement of a snap legislative election. The pair has since recovered slightly, reaching 1.0740 after the release of U.S. retail sales data. However, the risk premium associated with the French election is expected to limit the Euro’s upward momentum in the near future.
Analysts predict that the Euro’s exchange rate will likely remain within the 1.07 range in the short term, as stability has returned to the market with expectations of a hung parliament outcome in France. Halpenny warned of potential risks if there are any changes in this view or if the RN party performs better than expected in the first round of voting.
Overall, the political uncertainty in Europe, particularly in France, continues to impact the Euro’s value against the Dollar. Investors will be closely monitoring the upcoming election results to assess any potential changes in the risk premium associated with the Euro.