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EUR: Political Risks Loom Large But Lacking A Trigger For Now

EUR: Political Risks Loom Large But Lacking A Trigger For Now

On February 22, 2017, Posted by , In Uncategorized, By , With No Comments

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EUR: Political Risks Loom Large But Lacking A Trigger For Now

In the absence of an evident catalyst and amid a light economic data calendar, we expect EURUSD to remain range-bound this week.

The European political calendar remains heavy, but the EURUSD volatility term structure has moved broadly lower, with the exception of the 1m part of curve, which now captures the Dutch election next month.

We continue to see this as a downside risk for the EUR, but believe option-market pricing of French election risks is excessive. Despite a relative shift in the polls from François Fillon to Emmanuel Macron and speculation over a possible alliance of the left between Benoȋt Hamon and Jean-Luc Mélenchon, the polls imply that Macron and Fillon remain the most likely winners of any second round by a wide margin over Marine Le Pen.

Our analysis suggests that EURJPY exhibits the highest historical sensitivity to European political risks and is the best vehicle – over differing tenors – to capture both EUR downside over the Dutch election and its potential unwind on a positive French electoral outcome.

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