.jpg)
The French political drama and widening divergence in purchasing managers’ indices in the US and the eurozone have pushed the needle Euro against the US dollar Prices less than 1.07. Will the major currency pair hit the bottom? Let’s discuss this topic and make a trading plan.
Weekly fundamental forecast for the Euro
It is a well-established fact that politics has a profound impact on the economy, especially through financial markets. This manifests itself in higher borrowing costs, which in turn affects government debt servicing and slows down GDP. In addition, politics affects business activity, as expectations of difficult times can lead to lower PMIs. The recent political drama in France, which has widened domestic and German bond yield spreads and lowered European PMIs, is a clear example of how politics can impact EUR/USD.
Eurozone Composite PMI
Source: Financial Times.
Until early June, the major currency pair grew steadily on the back of a slowing US economy, while its European counterpart showed signs of recovery. Variation in GDP growth was shrinking, US exceptionalism seemed to be a thing of the past, and global economic synchronization became the focus of investors’ attention. That all changed over the summer.
Although the US continues to slow, as evidenced by the decline of the Citigroup Economic Surprises Index to its lowest level since mid-2022, early elections in France, the start of trade wars between US and EU allies and China, and the economic slowdown. In the Eurozone economy, the EUR/USD was forced to decline.
US economic surprise index
Source: Bloomberg.
The National Rally in France is gaining momentum. Opinion polls show support from 36% of voters, compared to 27% for the New Popular Front and 20% for the Ennahda movement led by Emmanuel Macron. If the right wins an absolute majority in Parliament, the matter could turn into a confrontation with the European Union. But events are likely to develop according to the Italian scenario, as there is still room for compromise in the end.
On the contrary, if Marine Le Pen’s victory is not convincing enough, a minority government will be formed, which would calm the markets but slow the French economy. There are no good scenarios for EUR/USD, and the major currency pair will remain under pressure before the first round of voting on June 30.
Party popularity rating in France
Source: Bloomberg.
The slowdown in the US economy and the rise in US stock indices due to artificial intelligence technologies facilitated the decline of the EUR/USD. However, once business activity in the US accelerated, the euro collapsed below 1.07. Until the Fed starts talking about interest rate cuts, the yield spread between Treasuries and their German counterparts will remain comfortably wide relative to the dollar.
Weekly trading plan for Euro against the US dollar
For the pair to bottom, the political situation in France will need to stabilize, and the US economy will cool further. However, new problems for the euro are already beginning to appear on the horizon. An increase in EU import duties on electric cars from China is fraught with retaliatory moves by Beijing. The approaching presidential election in the United States will increase the risks of anti-globalization. The inability of EURUSD to return above 1.0715 will indicate that bulls are losing steam and more short trades could be opened.
EURUSD price chart in real time mode
The content of this article reflects the opinion of the author and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as providing investment advice for the purposes of Directive 2004/39/EC.
