Euro: Political stress and limited FX reaction – Commerzbank

Commerzbank analysts Michael Pfister and Tatha Ghose have analyzed how political risks within the Eurozone, particularly in France, Spain, and Italy, influence the EUR/USD exchange rate and a trade-weighted Euro. Their research, spanning since 2010, reveals the Euro tends to react more significantly when multiple Eurozone countries and banks experience stress.

Currently, the widening of the French spread is viewed as a typical occurrence. In terms of EUR-USD, observable effects emerge when greater numbers of Eurozone countries face pressure, resulting in a sharper depreciation of the euro. When banking stress in European banks is included as an indicator, a notable depreciation of 0.73% on a median basis over five trading days can be observed.

However, it is evident that the euro responds when several countries are simultaneously under pressure, though a single country's stress does not strongly impact the euro. This suggests that the Eurozone's currency does react, with adjusted EUR-USD movements over the last ten trading days resembling those seen in June 2024. The present situation is deemed a normal response to crisis-related stress in France.

Stronger reactions are anticipated if stress spreads to banks, with investors flocking to the Swiss franc. So far, such signs are absent.