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Euro can extend bullish run despite existential political risk: UBS analysts

UBS
Chris Ratcliffe | Bloomberg | Getty Images

The euro could be poised to extend its bullish run in spite of "existential" political risks throughout Europe in 2017, according to a UBS report.

Analysts from Switzerland's largest bank suggested that investors' fears the euro/dollar would contract in the event of a eurosceptic party being elected were overpriced. Especially given the far more likely scenario in which the euro/dollar would continue to strengthen should pro-European parties emerge victorious.

"(The) risk reward in the EUR/USD is asymmetric," a team of UBS analysts said in a note.

"If the most likely (election) outcomes materialize and tail events are averted, euro/dollar has scope for a significant rally," the report added.

Big picture standpoint

Aurelien Morissard | IP3 | Getty Images

Concerns over the future of the European Union (EU) have increased as a result of rising populism throughout the continent with several key elections ahead. The Netherlands, France, Germany as well as potential snap elections in Italy and Greece could all take place this calendar year.

Investors appear anxious the wave of populism associated with the U.K.'s vote to leave the EU as well as the election of U.S. President Donald Trump could boost the electoral prospects of French far-right leader Marine Le Pen in May.

Le Pen has campaigned to take France out of the euro and while the chances of the National Front leader being able to hold and let alone win a referendum appear unlikely, many believe the future of the EU would be in serious question without its second-biggest power.

"The risk of an anti-euro party coming to power is an existential one for Europe," the UBS report warned, before adding that recent developments in the EU "have not been as bad from a big picture standpoint".

UBS analysts pointed to the recent political scandal of France's center-right presidential candidate Francois Fillon as one key reason to be optimistic over the euro.

Fillon has been accused of improperly employing family members as parliamentary assistants and although he vowed to continue his election campaign on Monday, he has dropped behind the former economy minister and independent candidate Emmanuel Macron in the polls.

The latest polling suggests Macron's chances of defeating Le Pen in the second and final round of voting in May are greater than that of Fillon's.

Further to this, UBS argued a second key reason to be bullish over the euro concerned Italy's constitutional court's decision on electoral law on January 25. The amendment has raised the likelihood of snap elections this year though the decision is perceived to have lowered the chances of a eurosceptic government gaining a majority.