Citi has highlighted the potential for heightened political risks in Europe as German regional elections begin on September 1. According to Citi European Economics, the elections could lead to significant shifts in regional policy, potentially destabilizing the national coalition and altering national fiscal policies. and causing a reorientation of German policy within the EU and internationally.
Financial markets have shown increased sensitivity to election risks this year. Similar events, such as the recent French elections, have previously affected the euro, leading to a decline in the value of and , in line with the widening of spreads.
These developments indicate that the upcoming German elections could also lead to market volatility, particularly affecting exchange rates.
Citi’s analysis shows that uncertainty surrounding election results could coincide with a seasonally stronger US dollar and an increase in volatility ahead of the US election.
The company notes that the DXY, an index that measures the dollar’s strength against a basket of currencies, continues to find support, while there is already a trend of leveraged positions being short the US dollar and long the euro.
In light of these factors, Citi maintains a cautious stance on the euro and is taking defensive positions against potential downside risks. The company remains short the Euro via a two-month EURUSD put option with a strike price of 1.08 (reference spot price at 1.1121 at 9:16 a.m. EST on August 28) and maintains a short position in the spot market (reference spot price at 0. 8413 as of 9:16 a.m. EST, August 28).
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