Traders are turning more pessimistic on the outlook for the euro, worried about France’s fiscal challenges and fresh political risks in the region.
The common currency fell to a 16-month low versus the pound and neared the weakest in a year against the Japanese yen on Wednesday. Meanwhile, a measure of bullish versus bearish demand for the euro against sterling show traders are favoring the UK currency for the first time in two years.
The moves come just a few days after the euro hit a 17-month low against the dollar, suggesting traders are looking beyond the greenback to bet against the common currency. European markets have sold off recently amid France’s prospect of government collapse and another deficit blowout.
“Concerns about France’s failure to reduce its budget deficit have been magnified by uncertainties connected with the approaching French presidential election,” said Jane Foley, a strategist at Rabobank. Rising French yields and a broader selloff in highly indebted European debt are adding to pressure on the euro, she said.
The turmoil in French markets has spilled into Europe’s government bond market, where a sharp selloff last week revived memories of the region’s debt crisis. A call for snap elections by Spanish Prime Minister Pedro Sánchez has only injected fresh political risk into regional markets.
The euro dropped as much as 0.7% versus the dollar to $1.1176 on Wednesday, and fell 0.4% against the pound to 84.48 pence, its lowest since June 2025. Rabobank’s Foley expects the currency to remain under pressure into next year and sees it at $1.12 over a one-year horizon.
As European risks grow, traders are seeking cleaner ways to express a bearish view on the euro than the dollar pair, which can be muddied by concerns over the US fiscal outlook and the greenback’s own risk premium. Hedge funds have increasingly favored euro shorts against the franc and yen, followed by the pound and dollar, according to FX traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.
Morgan Stanley strategists led by David Adams expect the euro to weaken further, and see better opportunities to bet against it than via the dollar. They recommend selling the euro against the Australian dollar and Swiss franc to hedge against rising fiscal and political risks, as well as a potential dovish turn by the European Central Bank if bond markets remain volatile.
Traders have pared wagers on further ECB rate hikes amid the bond selloff, with swaps favoring three quarter-point increases by September 2027 compared with four early last week.
The preference for euro crosses is also showing up in volatility markets. For the first time since March 2025, the cost of hedging euro-yen swings exceeded that of dollar-yen by more than 100 basis points. One-month risk reversals in euro-pound flipped in favor of sterling for the first time since August 2024.
What Bloomberg Strategists Say:
“The euro is in a bind: weakness in French bonds is weighing on the single currency but the most plausible source of OAT relief — a more dovish ECB — wouldn’t do it much good. EUR/USD has found itself tethered to the French-German 10-year yield spread. That’s unlikely to dissipate anytime soon.”
— Conor Cooper, Macro Squawk. Click here to read the full analysis.