A confidence vote for French Prime Minister Bayrou is happening today, with results expected around 1500 GMT. The euro has mostly ignored potential risks, even though Bayrou may be removed from office. Societe Generale warns that the market might not have fully considered the possible reactions. There are a few possible outcomes. Bayrou could lose the vote, leading to the appointment of a caretaker prime minister or the dissolution of the National Assembly. This might result in elections, which could lead to a hung parliament. If the elections create a hung parliament or a National Rally victory, it may introduce political and financial risks that could hurt the euro. Even if results are positive, the impacts on the euro could still be limited and potentially negative. Societe Generale indicates that markets currently seem relaxed, with the forecast for EUR/USD suggesting a target of 1.1570. With the French confidence vote approaching, the markets appear unconcerned. The one-month EUR/USD implied volatility is a low 5.8%, suggesting that traders might be underestimating the chaos that could follow if Prime Minister Bayrou is removed today. This complacency creates an opportunity since the risk leans toward a negative surprise for the euro. The most likely outcomes are either a caretaker government or the dissolution of the National Assembly for new elections. Looking back at the snap election in summer 2024 shows how situations like this can impact markets. A new election brings the risk of another hung parliament or a National Rally win, which recent polls show leading with 34% of the intended vote. The spread between French and German 10-year bonds is an important indicator to follow in the coming weeks. It’s currently around 65 basis points, but it went over 80 basis points during last year’s political uncertainty, showing how quickly sentiment can change. A similar rise could indicate significant stress and put pressure on the euro. Since options are currently inexpensive, buying downside protection, such as EUR/USD put options, could be a cost-effective way to prepare for turmoil. This strategy would benefit from a drop in the euro’s value along with a potential increase in volatility. The low volatility makes entering such a trade attractive. Even if Bayrou survives, the upside for the euro looks limited. However, scenarios leaning toward political instability suggest a drop to the 1.1570 area. The risks clearly favor those betting on a weaker euro.

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