Reality Check Coming for the Euro: Pro

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Investors in the euro should tread with caution, Geoffrey Yu, FX strategist at UBS told CNBC on Friday, warning that concerns over political stability in some of the euro zone's biggest countries could send the currency sharply lower again.

"One really strong point of complacency that the market has had over the last few weeks is to wait until the last minute before pricing in political woes. Now, that's really starting to impact the euro," Geoffrey Yu, FX strategist at UBS, told CNBC on Friday.

The single currency has fallen to a six-week low against the dollar, falling to $1.3166 on Thursday, far below a 15-month peak of $1.3711 seen at the start of February. The decline came as euro zone purchasing managers' data (PMI) released on Thursday showed a downturn in the region's economic activity and investor concerns over Italian elections this weekend rattled confidence.

(Read More: The Key Players in the Italian Election)

"Right now, things could unravel quite quickly," Yu told CNBC Europe's "Squawk Box." "In a few weeks, the whole thing could unravel and we're back to where we were last year," he said. Those who were not pricing in political risks were focusing too much on core European growth-which was rebounding "not as strongly as we had hoped," he added.

"Ultimately, nothing has changed in terms of the fundamentals of the euro zone, we're still seeing growth weaken, we're still seeing unemployment rise," Yu said.

"The thing that has been driving the euro higher this week is people positioning believing that things are getting better and being willing to put their money back into Italy and Spain to capture yields. But if politics goes the other way it will be proven that all the faith had been misplaced and everything could unravel," he said.

Italian elections on Sunday could pose a big surprise, analysts have told CNBC. Support for the "protest vote" represented by comedian Beppe Grillo's "5 Star Movement" threatens to upset an outright victory for front-runner Pier Luigi Bersani and his proposal for a coalition with technocrat Mario Monti, an alliance seen as the most stable for European markets and Italy's moribund economy.

With an estimated 50 percent of voters supporting anti-austerity parties such as Grillo's and Berlusconi's People of Liberty party, reform measures in Italy could be in jeopardy, analysts told CNBC.

(Read More: Italy Goes Down to the Wire as Nervous Investors Watch)

The yield on Italy's benchmark 10-year bond was 4.475 percent on Thursday, up five basis points. Italy's benchmark index appeared to have recovered from a volatile trading session on Thursday, falling 2.9 percent at market close before recovering on Friday, up 0.5 percent after the opening bell.