Key Takeaways
Political turmoil across the Eurozone and slowing economic growth will push the euro lower against the dollar, HSBC said Monday, forecasting further losses for the common currency.
Political risks in France and Italy, combined with weakening Eurozone growth momentum, will drive the euro lower against the US dollar, HSBC strategists said in a research note published June 29. The bank cited deepening political uncertainty in the region's two largest economies after France and Italy as key headwinds for the single currency.
"Eurozone political and growth risks point lower against the US dollar," HSBC said. The note comes as France's government struggles to pass its 2026 budget, reigniting concerns over fiscal sustainability, while Italy's coalition faces internal divisions over spending plans. Germany, the Eurozone's largest economy, continues to grapple with industrial weakness as manufacturing output remains below pre-pandemic levels.
The euro has faced persistent pressure as these political headwinds compound an already fragile growth picture. The Eurozone economy expanded at an annualized rate of 0.4 percent in the first quarter, well below the US growth rate of 2.8 percent. This growth differential has widened interest rate expectations between the European Central Bank and the Federal Reserve, with the dollar index holding near recent highs as the Fed maintains its restrictive stance.
A sustained euro decline carries significant implications for European markets. A weaker currency boosts the competitiveness of European exporters but raises import costs, particularly for energy and raw materials priced in dollars. European companies with significant dollar-denominated revenue stand to benefit, while those carrying dollar-denominated debt face higher servicing costs. The divergence in monetary policy outlooks between the ECB and the Fed has widened rate differentials in favor of the dollar, adding further pressure on the euro.
Political Risks Deepen Across the Eurozone
The political uncertainty extends beyond fiscal disputes. Industrial tensions between France and Germany over defense and industrial policy, highlighted by the collapse of the Dassault-Airbus sixth-generation fighter program, have underscored the difficulty of achieving European policy coordination. The program's failure, driven by a workshare dispute between the two countries, reflects broader fragmentation in European industrial strategy that weighs on investor confidence.
The last time political risks in the Eurozone reached comparable levels was during the 2022 Italian election cycle, when the euro fell more than 4 percent against the dollar over a three-month period. Current conditions suggest a similar trajectory, with currency options markets pricing elevated risk premiums for euro-denominated assets.
What's at Stake for Currency Markets
HSBC's call adds to a growing consensus among currency strategists that the euro's downside risks outweigh any potential upside from ECB policy adjustments. The next key test for the euro comes with the release of Eurozone inflation data and the ECB's July policy meeting, where the central bank will weigh the trade-off between supporting growth and maintaining price stability.
For institutional investors, the implications are clear: increased short positioning on EUR/USD, a stronger dollar index, and potential rotation out of European equities into dollar-denominated assets. Currency hedging strategies are likely to be adjusted as the euro's downward trajectory becomes more entrenched.
This article is for informational purposes only and does not constitute investment advice.
