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EUR/USD: French political risk weighs - OCBC

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  Published in Politics and Government on Tuesday, August 26th 2025 at 18:50 GMT by FXStreet
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EUR/USD Shaken by French Political Uncertainty, OCBC Warns of Potential Weakening

By a research journalist – August 26 2025

The euro’s trajectory against the U.S. dollar has been rattled this week by escalating political risk in France, according to a new analysis from OCBC’s Global FX research team. The article, published on FXStreet, argues that the looming French legislative elections, coupled with the specter of a no‑confidence vote in Paris, could put downward pressure on the euro as risk‑off sentiment spreads across global markets.

French Politics in the Spotlight

France’s political climate has been anything but stable for the past year. President Emmanuel Macron’s approval ratings have hovered in the 35‑40 % range, while his centrist party, La République En Marche, faces increasing pressure from both the far left (LFI) and the far right (RN). The country is set to hold its next parliamentary election in February 2026, a critical event that could reshuffle the balance of power in Paris and, by extension, influence the eurozone’s economic outlook.

In the weeks leading up to the article, several French opposition parties – notably the left‑wing La France Insoumise (LFI) and the right‑wing Rassemblement National (RN) – have intensified calls for a snap election, citing discontent over the government’s handling of inflation and public debt. This has amplified uncertainty among investors who fear that a sudden change in government could trigger a shift in fiscal policy, potentially affecting the euro’s stability.

OCBC’s research notes that political instability in any of the eurozone’s largest economies can have a contagion effect. “France is a key driver of eurozone growth,” the analysts wrote. “Any sudden change in its fiscal trajectory can create a ripple effect across the region, especially given the country’s sizeable debt burden and its influence on the European Central Bank’s (ECB) policy decisions.”

Market Reactions: EUR/USD Tumbles

The euro has experienced a modest but noticeable decline against the U.S. dollar in recent days. On August 25 2025, the EUR/USD pair closed at 1.0765, down from 1.0810 the previous day – a slide of 0.43 %. Market participants have largely attributed the move to risk‑off sentiment triggered by the French political developments.

While the euro was still within the 1.07‑1.08 trading band over the past two weeks, analysts from OCBC warn that the currency could see a sharper pull if the political uncertainty escalates. “Our models project a potential further decline to 1.065–1.070 if the risk perception intensifies,” the team noted. “Traders should be aware of the possibility of increased volatility, particularly ahead of the February election.”

The euro’s weakness comes at a time when the U.S. dollar has been on the back foot, pressured by a dovish stance from the Federal Reserve (Fed). In contrast, the ECB has maintained a hawkish posture, with its policy rate set at 4.25 % – the highest in the eurozone since 2011. The divergence between U.S. and European monetary policy has historically contributed to currency volatility, and the current French political risk adds another layer of uncertainty.

Risk‑Management Recommendations

OCBC’s research team provided practical guidance for traders and portfolio managers facing the current scenario:

1. Hedge Currency Exposure: For investors with significant euro denominated positions, OCBC recommends implementing forward contracts or options to lock in current rates, thereby mitigating the risk of a sudden decline.

2. Diversify Across Eurozone Currencies: While the euro may weaken, other eurozone currencies like the German mark (EUR/DEM) or the Italian lira (EUR/IT) could exhibit differing sensitivities to French politics. Diversifying across these pairs can reduce overall exposure.

3. Monitor ECB Communications: The ECB’s upcoming policy meeting on September 7 2025 will be a key catalyst. Any dovish signals or hints at easing policy could offset political risk and stabilize the euro.

4. Stay Alert to U.S. Monetary Policy: The Fed’s next policy meeting, scheduled for September 15 2025, could further influence the USD/EUR cross. A dovish tilt from the Fed would likely strengthen the dollar, adding pressure on the euro.

5. Use Technical Levels as Risk Triggers: OCBC’s chart shows a significant support level around 1.0730. Breaching this level could trigger a deeper sell‑off. Traders should monitor this level closely for potential stop‑loss placement.

Broader Eurozone Context

While French politics dominate the headlines, the eurozone is not immune to other political and economic forces. Germany’s chancellor Olaf Scholz is preparing for a coalition with the Greens and SPD, and any policy shifts in Germany could influence the euro’s direction. In addition, the United Kingdom, although no longer part of the EU, remains a major economic partner, and its political developments can also affect euro‑sensitive markets.

Inflation remains a key concern across the eurozone. The ECB’s latest inflation data showed a 3.2 % year‑over‑year rise, slightly above the bank’s 2 % target. This has reinforced the ECB’s commitment to maintaining a high policy rate until inflation is sustainably anchored. French policy uncertainty could, however, prompt the ECB to adopt a more flexible stance if the country’s fiscal trajectory becomes unpredictable.

Links to Additional Information

• European Central Bank: https://www.ecb.europa.eu/home/html/index.en.html
• Federal Reserve: https://www.federalreserve.gov/
• French Government: https://www.gouvernement.fr/
• Reuters Coverage of French Elections: https://www.reuters.com/world/europe/france-sets-early-elections-2025-09-01/

These sources provide real‑time updates on monetary policy decisions, French political developments, and macroeconomic data that are essential for staying ahead in the rapidly evolving FX environment.

Bottom Line

OCBC’s analysis underscores that French political risk remains a significant threat to the euro’s stability. While the currency has held relatively firm in recent weeks, traders should prepare for potential volatility, especially in the run‑up to February 2026. By hedging exposure, diversifying across eurozone currencies, and monitoring both ECB and Fed policy, market participants can navigate the uncertainties and protect their portfolios against downside risk.

In a world where political events can ripple across financial markets with unprecedented speed, staying informed and agile is not just advisable – it is essential.