French political turmoil hits the euro, hedge fund short bets reach more than six-year high

According to Zhihui Finance APP, as political turmoil continues in France, causing unrest in the European bond market and dragging down the euro, hedge funds are ramping up their bearish bets on the euro. Latest data shows that net short positions in euros held by leveraged funds have risen to their highest level since March 2020, reflecting further deepening pessimism among speculative traders toward the euro’s outlook.

According to data released on Friday by the US Commodity Futures Trading Commission (CFTC) and compiled by Bloomberg, for the week ending October 20, leveraged traders held about €11.8 billion (approximately $13.2 billion) in bearish euro bets. During the same period, net short positions in euros increased by 1,305 contracts to reach 94,138 contracts, the highest level since March 2020.

As euro short positions continue to rise, French fiscal and political risks are becoming a focal point for European financial markets.

This month, as French lawmakers reached an impasse over how to address the country's heavy debt burden, the French bond market has remained under pressure. Meanwhile, protests over the cost of living have further fueled political tensions, with some demonstrators clashing with police. The French government is preparing for the possibility of further clashes this weekend. The uncertainty in France is not only intensifying investors’ concerns over the country’s fiscal outlook, but also weighing on overall risk appetite across European markets.

In fact, speculators have 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. The market is worried that political risks in France may drag down Europe’s economic growth prospects, while also increasing uncertainty about the European Central Bank’s future monetary policy path.

With economic growth facing pressure, investors have begun to reassess whether the European Central Bank will further raise interest rates, and to what extent. This has also triggered concerns that the gap between US and European interest rates could further widen, thereby putting additional pressure on the euro exchange rate.

If the European Central Bank’s room for rate hikes is constrained by economic weakness, and US rates remain relatively high, the euro’s interest rate differential attractiveness against the US dollar may diminish even further. In terms of exchange rate performance, the euro weakened again against the US dollar this week. Previously, the euro ended a five-week losing streak, but the renewed uncertainty over French politics and Europe’s economic outlook has brought renewed selling pressure. As of this Friday, the euro had recorded a weekly decline of about 0.4% against the dollar.

Overall, French political turmoil, fiscal risks, and uncertainty about the European Central Bank’s policy outlook are collectively weighing on the euro’s performance. With leveraged funds’ net short bets on the euro rising to their highest level in over six years, the market’s caution toward the European economy and the outlook for the euro is becoming increasingly evident.

In the future, whether progress can be made in addressing France’s fiscal issues, and how the European Central Bank balances monetary policy between slowing economic growth and inflationary pressures, will be key factors influencing the euro’s subsequent trend.