French politics is no longer putting as much pressure on the euro as it used to, and new signs of a slowdown in the US economy have allowed the EURUSD pair to leave the consolidation range. Let’s discuss these topics and make a trading plan.
Weekly fundamental forecast for euro
Slowing US inflation, expectations that Marine Le Pen’s party will not be able to get an absolute majority in parliament, and France’s move towards a centrist government allowed EURUSD to break through the resistance level of 1.0725 and traders to open long positions. Politics will continue to weigh on the euro until the second round, but its grip has clearly weakened. Against this backdrop, the major currency pair has room to grow.
According to Elabe, the National Rally received 33% of the vote in the first round, the New Popular Front – 29%, and Emmanuel Macron’s Renaissance – 22%. This corresponds to 255-295 seats in the National Assembly for the right, 120-140 for the left, and 90-125 for the party of Emmanuel Macron and its allies. Now, Marine Le Pen’s opponents must join forces to ensure that her party does not win an absolute majority of 289 seats. If that happens, Jordan Bardella will become the new prime minister.
The most dire scenario for markets would be a better result for the New Popular Front. The National Rally has no intention of violating EU demands, and its victory increases the likelihood of repeating the Italian scenario. The right wing in Rome also criticized Brussels before the elections and became a team player. In any case, the results of the first round led to a decrease in the differential of French and German bond yields and an increase in EURUSD quotes.
France-Germany bond yield spread
Source: Financial Times.
The pressure on the euro eased, and a slowing US economy continues to bind US dollar fans hand and foot. In May, the US Personal Consumption Expenditure Index growth rate slipped from 2.7% to 2.6% y/y and from 0.3% to 0.1% m/m, the core PCE failed to edge higher from the previous month and slowed from 2.8% to 2.6% y/y. Markets have all but stopped believing that inflation would accelerate again as it did at the start of the year and are giving a 95% probability of two Fed rate cuts in 2024. September’s odds are estimated at 63%.
US inflation
Source: Financial Times.
If you keep watching the US economy cooling, sooner or later, you want to prevent it from freezing up completely. The Fed is on the verge of declaring victory over inflation. Oxford Economics believes that in such a situation, the labor market report becomes a more crucial data release than the CPI and PCE figures. It already has become. Weak employment data for April boosted EURUSD quotes, while the strong one for May dragged the price down.
Weekly trading plan for EURUSD
The June report will set the direction for US dollar pairs for at least the next month. However, the EURUSD pair will likely show turbulent trading until the release. The French elections are ongoing, and the UK will vote on July 4. In addition, slowing inflation in the eurozone may put pressure on the euro. As for now, long trades initiated at 1.0725 can be kept open, betting on the cooling US labor market.
Price chart of EURUSD in real time mode
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