French budget and election risks weigh heavily, euro posts its worst monthly performance in over a year, hedge funds increase short positions accordingly

Zhitong Finance APP has learned that as France’s political and fiscal risks continue to intensify, hedge funds are aggressively buying options and betting on a decline in the euro against the US dollar to seek profits.

Data from the Depository Trust & Clearing Corporation (DTCC) shows that on Wednesday, trading volume for euro/dollar put options with a notional value of 100 million euros ($113 million) or more was more than twice that of call options. CME Group data shows that on Tuesday, put option volumes were about 2.5 times that of call options.

Thomas Bureau, Global Head of FX Options Trading at Societe Generale SA, said, “Over the past few trading days, among trades that are long on the US dollar, euro/dollar is undoubtedly one of the market’s top choices.”

He indicated that Tuesday’s market highlights not only directional demand for a decline in the euro but also the broad extent of buying across maturities. He said hedge funds are mainly focused on one-month maturities to cover the upcoming European Central Bank and Federal Reserve meetings, while volatility relative value strategy accounts that rely on spread arbitrage are active on the longer end of the curve, with a concentration on one-year tenors.

In September, the euro fell 2.5% against the US dollar, marking its worst monthly performance since July 2025, with the escalating political and fiscal risks in France being one of the main reasons.

Investors are anxious about next year’s presidential election in the country, as opposition parties have signaled they are unwilling to compromise with President Macron.

The French debt agency announced plans to issue a record amount of bonds in 2027 to finance the budget deficit and refinance maturing debt. The government is scheduled to release its budget for 2027 on Thursday.

Meera Chandan, Co-Head of Global FX Strategy Research at JPMorgan in London, said the drivers of the euro/dollar’s movement “include a hawkish repricing of Fed policy—which the euro/dollar had previously failed to keep up with—as well as the widening yield spread on French government bonds and deteriorating terms of trade.”

This week, ECB President Christine Lagarde stated that rising bond yields will curb economic growth and slow inflation, adding further pressure to the euro/dollar.

Julian Weiss, Head of G-10 FX Options Trading at Bank of America in London, said that demand for downside options on the euro/dollar is rising, with maturities stretching from shorter dates out to the summer of 2027, thereby covering volatility that may be triggered by next year’s European election cycle.

He added: “We are seeing growing demand for euro put options from both hedge funds and real-money accounts. Given the pressure in the rates market and Europe’s reliance on energy, the euro/dollar has remained the preferred instrument among G-10 currencies for going long on the US dollar.”