French Political Turmoil Hits Euro as Hedge Fund Short Bets Reach Over Six-Year High

As France's political situation remains in turmoil, unsettling the European bond market and weighing on the euro, hedge funds are ramping up bearish bets on the euro. The latest data shows that net short euro positions held by leveraged funds have risen to the highest level since March 2020, reflecting a further deepening of speculative traders' pessimism about the euro's outlook. According to data released by the U.S. Commodity Futures Trading Commission (CFTC) on Friday and compiled by Bloomberg, leveraged traders held bearish euro bets worth about 11.8 billion euros (approximately $13.2 billion) in the week ended October 20. During the same period, net short euro positions increased by 1,305 contracts to 94,138 contracts, the highest level since March 2020. As euro short positions continue to build, France's fiscal and political risks are becoming the focus of European financial markets. Since the start of this month, the French bond market has been under sustained pressure as French lawmakers remain deadlocked over how to address the country's heavy debt burden. Meanwhile, protests over the cost of living have further heightened political tensions, with some demonstrators clashing with police. The French government is preparing for possible further clashes this weekend. The uncertainty in France has not only intensified investors' concerns about the country's fiscal outlook but also weighed on risk appetite across European markets. In fact, speculators have continuously maintained net short euro positions since February this year, and the recent turmoil in France's political and fiscal situation has further reinforced this trend. Markets are concerned that French political risk could drag on Europe's economic growth outlook while increasing uncertainty over the European Central Bank's future monetary policy path. As economic growth comes under pressure, investors are beginning to reassess whether the European Central Bank will raise rates further and by how much. This has also raised concerns that the interest rate gap between Europe and the U.S. could widen further, putting pressure on the euro exchange rate. If the ECB's room for rate hikes is constrained by economic weakness while U.S. rates remain at relatively high levels, the euro's yield advantage relative to the dollar could weaken further. In terms of exchange rate performance, the euro weakened again against the dollar this week. The euro had previously ended a five-week losing streak, but recent uncertainty over France's political situation and Europe's economic outlook has exposed the euro to renewed selling pressure. As of Friday, the euro recorded a weekly decline of about 0.4% against the dollar. Overall, French political turmoil, fiscal risks and uncertainty over the ECB's policy outlook are jointly weighing on the euro. With leveraged funds' net short bets on the euro rising to the highest level in more than six years, the market's cautious sentiment toward the European economy and the euro's trajectory is becoming more evident. Looking ahead, whether progress can be made on France's fiscal problems and how the European Central Bank balances monetary policy between slowing economic growth and inflationary pressure will be important factors influencing the euro's subsequent trajectory.