Euro Drops 1.4%, CAC 40 Falls Amid EU Political Jitters

Key Takeaway

• The euro has dropped 1.4% amid political uncertainty from Macron's snap election call and strong US jobs data.
• European stocks, particularly France's CAC 40, fell 2.1%, with bank stocks hit hardest due to political instability.
• Leveraged traders' net long euro positions may worsen the currency's decline as they adjust to new economic conditions.

Euro Weakens Amid Political Uncertainty

The euro is facing increased pressure following French President Emmanuel Macron's unexpected decision to call a snap parliamentary election. This move comes in the wake of a significant defeat for Macron's party in the European Parliament elections, which has added a layer of political uncertainty to the region. The euro-dollar pair has dropped about 1.4% from its post-European Central Bank (ECB) high above $1.09, with a near 1% decline attributed to the strength of the recent US jobs report. The one-month euro-dollar risk-reversal has also fallen, indicating renewed bearish sentiment.

Bloomberg Intelligence Chief G10 FX Strategist Audrey Childe-Freeman suggests that bearish views on euro-franc and euro-sterling might be more effective ways to navigate the current political landscape in France. "The Fed remains key for the pair," she noted, emphasizing the importance of US monetary policy in the euro's performance.

European Stocks React

European equities have also been affected by the political developments in France. The CAC 40, France's benchmark stock index, has dropped 2.1%, with bank stocks experiencing the most significant losses. The broader European stock market has followed suit, reflecting investor concerns over the potential instability in the region. The euro has fallen 0.5% against the US dollar, reaching a one-month low.

The market reaction underscores the heightened sensitivity to political events in Europe, particularly when they involve major economies like France. The surprise election call by Macron has introduced additional uncertainty, which is likely to weigh on investor sentiment in the near term.

Impact of US Economic Data

The recent strength of the US jobs report has also played a role in the euro's decline. Strong employment numbers in the US have bolstered the US dollar, making it more attractive relative to the euro. This has contributed to the euro's downward trajectory, adding to the bearish outlook for the currency.

The latest data from the Commodity Futures Trading Commission (CFTC) shows that leveraged traders had shifted to net long euro positions ahead of last week's ECB interest rate cut. This positioning may exacerbate the euro's decline as traders adjust their positions in response to the new political and economic landscape.

Street Views

• Audrey Childe-Freeman, Bloomberg Intelligence (Bearish on euro-franc and euro-sterling):

  "Bearish euro-franc and euro-sterling views may be better ways to navigate French politics."