Political Risk Worth More Than 1% in Key Euro Crosses Says Barclays

European political risk could push key euro crosses more than 1% lower if the right wing National Rally wins the French election at month-end, with losses likely to be largest in EUR/GBP, according to a Barclays model.

The pair was last quoted in late afternoon European trading Tuesday at 0.8453, up less than 0.1%.

"Arguably, France's political predicament today poses more similarities with the Italian example of the past decade than the 2017 French election," Barclays strategists said in a Tuesday note to clients.

"It is therefore instructive to look to that precedent and quantify the potential FX impact of a similar scenario in France. We do this by simulating the effect of a one standard deviation shock to sovereign spreads on key EUR-crosses based on a regression of FX changes to sovereign spread changes," they added.

Barclays used the sovereign spread widening and foreign exchange fallout seen during the 2018 Italian election as a template for estimating how EUR/USD, EUR/GBP and EUR/CHF might trade if the National Rally wins on June 30 and July 7.

The analysis suggests losses of more than 1% for each pair and indicates that EUR/GBP would likely fall the most, by just more than 1.2%. However, the British lender expects Central and East European currencies to be harder hit than the euro.

"In our view, however, the CEE FX sell-off could extend as the risk of a Le Pen victory questions the sustainability of EU fund inflows to CEE countries and the EU's commitment to counter Russian aggression," the Barclays strategists said.