Citi has highlighted the potential for increased political risk in Europe ahead of Germany’s regional elections on September 1. According to Citi European Economics, the elections could lead to significant changes in regional politics, which could destabilize the national coalition, change domestic fiscal policy, and change Germany’s policy direction in the EU and internationally.

Financial markets have shown heightened sensitivity to election-related risks this year. Similar events, such as the recent French election, have previously affected the euro, leading to a decline in the value of the and , in line with a widening spread.

These events indicate that the upcoming elections in Germany could also trigger market volatility, particularly by affecting currency rates.

Citi analysis suggests that uncertainty surrounding the election results could coincide with a seasonal strengthening of the US dollar and an raise in volatility leading up to the US election.

The firm notes that the DXY, an index measuring the dollar’s strength against a basket of currencies, continues to find support, while a trend of taking miniature positions against the US dollar and long positions against the euro is already apparent.

In lightweight of these factors, Citi maintains a cautious stance on the euro, taking defensive positions against potential downside risks. The firm remains miniature the euro via a two-month EURUSD put option with a strike price of 1.08 (reference spot price of 1.1121 as of 9:16 a.m. ET, Aug. 28) and maintains a miniature position in the spot market (reference spot price of 0.8413 as of 9:16 a.m. ET, Aug. 28).

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