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The 2022 French presidential election campaign has many similarities to 2017, but also some notable differences. In FX, a risk premium is already visible in implied volatility ahead of the vote, but EUR/USD spot should be unaffected this year, economists at ING brief.

The French election risk a story for FX volatility for now but not for FX spot

“For now, we expect the spectre of the 2022 French presidential election risk to be rather a story for EUR/USD implied volatility markets than for the spot market. The EUR/USD implied volatility curve already exhibits a kink in the term structure around the April 2022 election date.”

“As for the EUR/USD spot, the prime driver for the coming months should be the road towards the expected summer eurozone economic recovery, helped by a faster vaccination process, the resulting improvement in poor eurozone activity data and the re-pricing of the bad news priced into the EUR/USD. This is evident in our short-term fair value model, which sees EUR/USD as undervalued by close to 2% at this point.”

“While the polls look much tighter now than back in 2017, things look set to improve in favour of the market-friendly candidate Macron by the time of the election; the economy should recover and the worst of the covid situation should be over. That suggests that the EUR/USD risk premium ahead of the 2022 elections may not exceed that observed in 2017.”

“Importantly, the associated election risk premium in EUR/USD spot should be apparent in the cross much closer to the election date (in 2017, the French election risk premium started to be built into EUR/USD less than one month ahead of the event) rather than this year, allowing EUR/USD to focus on eventual positives this summer and the pair to move to the 1.25 level by summer.”