Euro: Political stress and limited FX reaction – Commerzbank

Commerzbank analysts Michael Pfister and Tatha Ghose examine how Euro political risks, especially in France, Spain and Italy, transmit to EUR/USD and a trade-weighted Euro. Their study since 2010 finds the Euro reacts more when several Euro area countries and banks are under stress, with current French spread widening seen as a historically normal episode.

Euro response to multi-country stress

"In EUR-USD, an effect can be observed when more euro area countries come under pressure (i.e. the euro depreciates more sharply). If European banking stress is also included as an indicator, fairly significant depreciation - adjusted for macro factors - of 0.73% on a median basis over five trading days becomes apparent."

"Nevertheless, it is evident that the euro reacts when several countries are under pressure simultaneously. When only one country is affected, however, it does not seem to have a particularly strong impact on the euro."

"Therefore, on closer inspection, it is clear that the euro does react: over the last ten trading days, the adjusted EUR-USD movement has been similar to that seen in June 2024. What we are currently seeing, then, is a normal reaction to crisis-related stress in France."

"It is only when the stress spreads to the banks and investors flee to the Swiss franc that the euro is likely to react more strongly. There is little sign of this at present."