EUR/USD near-term price forecast after the French blip

Investing.com -- The euro looks well-positioned to resume its uptrend against the U.S. dollar, according to Bank of America, after what the bank characterises as a short-lived French-driven setback.

With the “balance of risks” now favouring a return to its bullish euro stance for the year, strategist Howard Du argues that the broader macro setup has realigned in the currency’s favour.

EUR/USD briefly slipped to a 1.15 handle last week after trading near 1.17, a move Du links to a tactical burst of dollar strength rather than a structural shift in trend. The political risk premium tied to France appears to be fading.

The 10-year OAT-Bund spread peaked on October 6 and has since stabilised, and the bank notes that the tail risk of new elections has eased as Macron was unlikely to reappoint Lecornu without firm parliamentary support.

On the dollar side, Du highlights that “any U.S.-originated headlines to escalate the global trade shock is still bearish for the USD,” and points to the upcoming Supreme Court hearing on IEEPA tariffs as a potential headwind for the currency.

Meanwhile, hedge funds have turned slightly net long USD after the strongest week of dollar demand this year, according to BofA’s flow data. Yet sentiment remains tilted the other way, with the latest survey still showing an “overwhelmingly bearish USD view” among institutional investors.

Seasonality also provides a constructive backdrop. With 57 business days left until year-end, EUR/USD has historically delivered a median gain of 1.5% over this stretch.

Historically, when EUR/USD is positive in the first half of the year, it has finished the second half higher in roughly three-quarters of observations since 1999.

From a positioning standpoint, current volatility levels open room for tactical structures. Implied vol has firmed, but one-week realised vol has held around a six handle.

Risk reversals dipped below zero again at sub-three-month tenors, which Du sees as an opportunity to express bullish EUR exposure via 3m topside risk reversals or seagull structures at low or zero-cost premium.

The strategist warns, however, that spot-to-vol correlation has narrowed and that dollar weakness has yet to materialise consistently across time zones.

For those looking beyond the pair, EUR/CAD is highlighted as an alternative.

“Investors who hold a relatively more bullish USD view could consider fading last week’s EUR weakness via higher EURCAD, where 3m implied vol remains on a 5-handle and fundamentally we see the current uptrend having room to rally to 1.65,” Du said.