Traders are growing increasingly pessimistic about the euro's outlook, with France's fiscal challenges and emerging political risks in Europe unsettling investors.

The euro fell to a 16-month low against the pound on Wednesday and approached a one-year low against the yen.

Meanwhile, an indicator measuring demand for bullish and bearish euro-pound positions showed traders favoring the pound for the first time in two years.

This comes just days after the euro dropped to a 17-month low against the dollar.

The latest moves indicate that traders are no longer expressing bearish euro views solely through the dollar.

European markets have recently suffered a sell-off, with the French government facing the risk of collapse while the fiscal deficit may once again significantly overshoot targets.

Rabobank strategist Jane Foley said, "Concerns triggered by France's failure to reduce its budget deficit have been further intensified by uncertainty surrounding the approaching French presidential election."

She noted that rising French government bond yields and a broader sell-off in bonds of highly indebted European countries are adding further pressure on the euro.

Turmoil in the French market has already spread to the European government bond market.

Last week, European bonds suffered a fierce sell-off, reawakening memories of the European debt crisis.

Spanish Prime Minister Pedro Sanchez's announcement of early elections has added yet another layer of political risk to European markets.

The euro fell as much as 0.7% against the dollar to $1.1176 on Wednesday, and declined 0.4% against the pound to 0.8448 pounds, the lowest level since June 2025.

Rabobank's Foley expects the euro to remain under pressure through next year, and forecasts the euro will trade around $1.12 against the dollar over the coming year.

As European risks mount, traders are seeking more direct ways than euro-dollar to express bearish euro views, since concerns about the U.S. fiscal outlook and the dollar's own risk premium could distort euro-dollar movements.

According to foreign exchange traders familiar with the relevant trades, hedge funds are increasingly inclined to express bearish euro views by shorting the euro against the Swiss franc and the yen, followed by the pound and the dollar.

These traders requested anonymity because they were not authorized to speak publicly.

Morgan Stanley strategists including David Adams expect the euro to weaken further and believe other currency pairs offer better shorting opportunities than betting through euro-dollar.

They recommend selling the euro against the Australian dollar and the Swiss franc to hedge against rising fiscal and political risks, as well as the risk that the European Central Bank may turn dovish if bond market volatility persists.

With the bond market sell-off, traders have reduced bets on further ECB rate hikes.

The swaps market currently leans toward pricing in three 25-basis-point rate hikes by the ECB through September 2027, compared with four hikes expected in early last week.