Euro Set to Resume Uptrend Against US Dollar Despite French Setback

Bank of America sees bullish momentum returning for EUR/USD as political risks ease and dollar headwinds persist

EUR/USD Forecast: Recovery After the 'French Blip'

The euro appears poised to regain its strength against the US dollar after a short-lived dip, according to analysts at Bank of America (BofA). Despite a recent retreat caused by political uncertainty in France, the broader macroeconomic outlook now favours a bullish trend for the euro.

Key Points at a Glance

• EUR/USD slipped to 1.15 last week, from nearly 1.17
• Political risks in France are receding, easing investor concerns
• US dollar strength appears tactical rather than a longer-term trend
• Seasonality and macro data support a bullish euro outlook into year-end
• Traders are shifting positions, with growing long interest in EUR

French Political Jitters Fade

The temporary dip in EUR/USD was attributed to a brief period of dollar strength, amplified by political uncertainty in France. BofA strategist Howard Du noted that the risk premium tied to potential French elections is diminishing. The 10-year OAT-Bund spread—often used as a gauge of political risk in the Eurozone—peaked on 6 October and has since stabilised.

President Macron's reluctance to reappoint Sébastien Lecornu without strong parliamentary backing further suggests a lower chance of snap elections, easing investor concerns.

Dollar Headwinds Persist

While the US dollar experienced a strong week of demand, BofA notes this may be short-lived. Du highlighted that any negative headlines tied to US trade policy—such as the upcoming Supreme Court hearing on IEEPA tariffs—could weigh on the greenback.

Although hedge funds have turned slightly net long USD, institutional sentiment remains broadly bearish.

Seasonal Strength for the Euro

Historical data supports a stronger euro towards the end of the year. With 57 business days remaining in 2025, EUR/USD has historically gained a median 1.5% during this period.

Notably, in three out of four years since 1999, when the euro posted gains in the first half, it ended the year even higher. This pattern further strengthens the case for an end-of-year rally.

Trading Opportunities and Investor Positioning

Volatility remains supportive for tactical trading strategies. One-week realised volatility has stayed steady, while implied volatility has edged higher. Risk reversals—used to gauge market sentiment—have dipped below zero at shorter tenors, offering an opportunity for cost-effective bullish trades such as:

• 3-month topside risk reversals
• Seagull structures with low or zero-cost premiums

However, Du cautioned that the spot-to-vol correlation has narrowed, meaning dollar weakness hasn’t yet translated consistently across all markets.

Alternative Currency Plays: EUR/CAD

For investors less bullish on USD, BofA highlights EUR/CAD as an attractive alternative. With fundamentals supporting further upside, the pair could rally toward 1.65. Volatility is lower here, with 3-month implied vol still around 5%.

Outlook for Markets

The easing of political tensions in France, coupled with seasonal euro strength and weakening dollar fundamentals, makes a compelling case for EUR/USD to resume its upward momentum. While risks remain, particularly from shifting US policy headlines, the macro setup increasingly supports a bullish euro view.

Currency traders and institutional investors may see strategic opportunities in both EUR/USD and EUR/CAD pairs in the months ahead.

Sources: (Investing.com, Reuters.com)