Euro fixing slips 0.25% on French unrest: what political risk means

The euro lost ground against the US dollar to start the week as unrest in France weighed on the single currency. The ECB reference rate for EUR/USD on 19 October was 1.1225, down 0.25% from the 16 October fixing of 1.1253.

According to the investingLive Asia-Pacific wrap, the euro opened lower on escalating riots in France, drone incidents over the Black Sea and US warnings over EU tech rules, then recovered most of that gap. investingLive's European session wrap said French unrest weighed on the euro, and Investing.com reported that the euro dipped on French turmoil and that euro bond spreads widened amid the unrest. Elsewhere, investingLive reported that China's Q3 GDP beat forecasts at 4.5%, and the AUD/USD fixing rose 0.39% to 0.6986. The biggest move among the majors was USD/CAD, whose fixing fell 0.61% to 1.4074 on a day when, per investingLive, Canada's September CPI came in at 3.1% against 3.2% expected. Our sister site has a fuller round-up of the euro, the Aussie and the loonie on Monday.

What is political risk?

Political risk is the chance that events in politics or society hurt a country's economy or its assets. Examples include protests, riots, a collapsing government, a disputed election or a fight over a budget.

Currency traders care because investors want stable places to hold money. When a country looks unstable, some investors sell its bonds and its currency. One sign of this is a wider bond spread, which is the gap between the interest rate on one government's bonds and another's. A wider gap means investors want extra pay to hold the riskier bonds.

France uses the euro. So trouble in France can weigh on the whole euro, not just on French assets.

A worked example

A useful test is to ask: did the euro fall because of Europe, or because the dollar rose everywhere? Compare several pairs using the ECB fixings for 16 and 19 October.

The EUR/USD arithmetic:

1. Change in price: 1.1225 - 1.1253 = -0.0028, or 28 pips.
2. Percentage change: -0.0028 / 1.1253 = -0.249%, rounded to -0.25%.
3. In money terms: 10,000 euros were worth 10,000 x 1.1253 = $11,253 on 16 October and 10,000 x 1.1225 = $11,225 on 19 October. That is $28 less.

Now compare. GBP/USD moved only 0.0005 (1.3330 - 1.3335). The Australian dollar rose against the dollar, and the dollar fell against the Canadian dollar. So the dollar was not strong across the board. The euro's drop stands out. That pattern fits a euro-specific story, which is what the news reports describe. Investing.com summed it up as "Dollar holds steady as French unrest weighs on Euro".

Keep the size in view. Over five fixings, EUR/USD is still up 0.39%. One day of political news has not erased the past week's gains.

You can follow the pair on a EUR/USD chart.

Why it matters for new traders

Political risk is hard to schedule. Data releases appear on a calendar. Riots and government crises often do not. That means prices can jump without warning, sometimes when markets open after a weekend, as investingLive described for the euro on Monday.

Political news can also fade fast. The euro recovered most of its opening gap in Asian trading, according to investingLive. A headline can move a price before anyone knows whether it will matter in a week.

Finally, comparing pairs helps you find the real driver. If only one currency falls, the cause is probably local. If every currency falls against the dollar, the cause is probably the dollar.

Key terms

• Political risk: the chance that political or social events hurt a country's economy, bonds or currency.
• Bond spread: the gap between interest rates on two governments' bonds.
• Gap: a jump in price between one trading session's close and the next one's open.
• ECB fixing: the official euro reference rate, set once per business day. It is not a live quote.
• Pip: the smallest standard price step, 0.0001 for EUR/USD.