- EUR/USD remains under pressure.
- The European Central Bank is eyeing French risk ahead of Sunday’s vote.
- Recently, the euro is losing ground again as analysts say the upcoming French vote will sharpen investors’ minds, and ECB members are beginning to express concern about the risks posed by the outcome.
- EUR/USD’s losses have reached the 1.0665 support level, its lowest in nearly two months, and it is holding around 1.0695 at the time of writing ahead of a raft of key US economic releases.
In general, the first round of voting in the French legislative elections will take place next Sunday, and the National Rally (RN) party looks set to win the most votes. Furthermore, the Economist’s poll shows the National Front leading with 37% of the vote, ahead of the left-wing New Popular Front (29%) and Emmanuel Macron’s party (21%).
A Bloomberg poll published yesterday showed Marine Le Pen’s National Rally party’s lead widening to more than 35%, with the New Popular Front coalition holding steady at 28%.
According to the live trading recommendations page, the EUR/USD exchange rate is likely to remain under pressure if investors feel that European Central Bank (ECB) policymakers may react to developments in France in the coming weeks. “The ECB may be getting more concerned about France,” says Dr. Win Thin, an expert at Brown Brothers Harriman. Moreover, let’s assume that the ECB is getting more concerned about the potential risks posed by rising French debt costs, even if they are limited. In that case, they may adopt a more “dovish” stance on monetary policy (i.e., be more inclined to cut interest rates). “Political transition translates physiologically into political uncertainty: households and investors need to form a view on how the next government will handle many crucial economic and political decisions,” he warns, citing Fabio Panetta, a member of the European Central Bank’s governing council. “This can lead to capital outflows and currency depreciation. This creates upward pressure on prices, but it can also undermine confidence and weaken demand, potentially halting or even reversing the fragile recovery we have seen so far.”
Panetta added that “central banks must be prepared to deal with the consequences of such shocks if they occur. This implies being ready to use the full range of tools available to them to adjust the monetary stance and address any threats to price stability and the transmission mechanism of monetary policy.”
In forex trading, the euro sharply dropped when Emmanuel Macron unexpectedly called for a vote but has since recovered some of those losses. Analysts believe this might be because the National Rally is trying to reassure voters that it will avoid drastic measures that could trigger a full-blown bond crisis. The experience of former UK Prime Minister Liz Truss serves as a warning of how markets react negatively to attempts to increase spending or cut taxes without a credible plan to finance these moves. Le Pen stated in an interview, “I respect institutions, and I am not calling for institutional chaos.” She emphasized that “there will simply be coexistence.” These efforts to calm the markets seem to have succeeded to some extent, as the selling pressure has stabilized.
However, analysts are still concerned about further euro weakness before Sunday's vote. Only candidates who secure more than 50% of the votes in Sunday’s election are elected directly. Those receiving support from at least 12.5% of registered voters move on to the final round on July 7. Clearly, the biggest risk for the euro is the advance of the left-wing New Popular Ecological and Social Union in the second round, as their significant spending plans would require substantial borrowing, which bond markets might struggle to absorb.
The New Popular Ecological and Social Union is a coalition of left-wing parties, including Jean-Luc Mélenchon’s France Unbowed, the Socialist Party, the French Communist Party, and the Greens. They plan to raise the monthly minimum wage to €1,600, impose price caps on essential goods, electricity, gas, and petrol, reverse Macron's unpopular decision to raise the retirement age to 64, and invest heavily in green transition and public services.
Ultimately, Prime Minister Gabriel Attal commented that their agenda would expose France to “financial defeat.”
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EUR/USD Technical analysis and forecast:
As we mentioned before, the EUR/USD will remain in a bearish trend and there may be a chance of moving towards the psychological support level of 1.0500 if the euro suffers a setback from the French election results. Otherwise, it may recover some of its losses but then it will interact with the path of global central bank policies at a time when the US Federal Reserve has been racing in the pace of tightening its policy. Today will be the interaction with the results of the US economic data, GDP, weekly jobless claims, and durable goods orders.
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