- At the start of trading this important week, EUR/USD remained stable at $1.0843 after falling to $1.0815 as investors overcame the initial shock of the French election results.
- A left-wing coalition unexpectedly took the lead, resulting in a hung parliament.
- This outcome is seen as favourable compared to a potential right-wing government.
- Now, France faces tax negotiations to form a government, following the rise of the left-wing bloc that thwarted far-right leader Marine Le Pen's bid.
The French left-wing alliance won 182 seats, Macron's centrists 168 seats, and Le Pen's National Rally 143 seats. Meanwhile, US and eurozone data, particularly CPI data from the US and Germany, will be crucial in shaping expectations for future rate cuts. Recent US economic data has boosted hopes for a Fed rate cut in September, while the timing of ECB cuts remains uncertain.
EUR/USD weekly forecast:
The Euro starts trading the new week on a softer footing, but the French election result is not a fatal blow, and the single currency can continue its recovery in the near term. According to reliable trading platforms, the euro/dollar exchange rate was softer on Monday after the French legislative elections resulted in an unexpected victory for a coalition of left-wing and far-left parties. Despite the victory of the left-wing bloc, it does not have the numbers needed to form a majority, and it is difficult to see how this volatile group can remain united when concessions to other political parties are required.
In short, France has a “hung” National Assembly, which means that extremists from the left and right are avoided. However, a period of political deadlock lies ahead, which could be problematic for a country that must reduce its debt levels in the coming years.
Electronic trading books show that EUR/USD entered the French vote with springy steps, benefiting from the broad-based weakness seen in the US dollar last week. Recently, the dollar fell as market bets on a Fed rate cut increased again, driven by a string of data that came in below expectations. Obviously, this confirms that even the drama provided by French politics will ultimately be a secondary consideration for currency markets compared to the Fed.
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EUR/USD Technical analysis and forecast:
The EUR/USD price broke above the 50-day moving average in last week’s trading as bullish momentum began to build again. This is confirmed by the Relative Strength Index, which is now positive and pointing to the rise again. This week, we could see a test of 1.0850, and then the eyes will turn to 1.09.
To achieve these levels, the US inflation reading on Thursday will need to be lower than expected. The headline CPI is expected to fall to 3.1% year-on-year, down from 3.3% in May, a level last seen in January. Moreover, core inflation is forecast to come in at 0.2% month-on-month. Clearly, such readings could signal that the US inflation downturn is underway again, after being disrupted by the acceleration in prices in the first half. This would increase the chances of the Federal Reserve cutting interest rates in September, potentially weighing on the US dollar.
The inflation report will be followed by Friday’s Labor market report, which confirmed that there is an easing trend, and this will continue to reduce wage pressures. Ultimately, lower wages will ease domestic inflation. Overall, further repricing towards further rate cuts by the Fed will weigh on the US dollar.
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