EUR/USD declines to one-month low amid Eurozone’s political uncertainty

June 10, 2024 9:04 am

EUR/USD weakens to 1.0750 on Monday amid multiple headwinds.
Euro tumbles as French President Emmanuel Macron calls for a snap election, which triggers political uncertainty.
Strong US labor market data diminishes Fed rate-cut bets, which boosts the US Dollar’s appeal.

EUR/USD extends its decline to 1.0750 in Monday’s European session. The major currency pair weakens as political uncertainty in the Eurozone after French President Emmanuel Macron calls for a snap election weighed heavily on the Euro. Macron’s unexpected move on Sunday evening came after exit polls indicated that Marine Le Pen’s far-right National Rally (RN) scored 32%-33% seats in European parliamentary elections under the leadership of the party’s president, Jordan Bardella, which was more than double from Macron’s centrist’s list.

After the dramatic announcement of a snap election, Macron added: “I have confidence in our democracy, in letting the sovereign people have their say. I’ve heard your message, your concerns, and I won’t leave them unanswered”, The Guardian reported. However, there could be potential consequences if Macron’s party faces more losses than forecasted by exit polls, which could deepen uncertainty over the Euro’s outlook.

On the monetary policy front, European Central Bank (ECB) policymaker and President of the Deutsche Bundesbank Joachim Nagel warned about a stubborn inflation outlook, especially in the service sector, due to strong wage growth. Worries about inflation becoming sticky suggest that the policy-easing campaign would be slow.

ECB President Christine Lagarde already said in the monetary policy press conference after cutting the central bank’s Deposit Facility Rate by 25 basis points (bps) to 3.75% that the bank is not committing to any specific interest-rate path and will remain data-dependent as inflation could remain bumpy in next few months.

Daily digest market movers: EUR/USD falls inside the woods amid uncertainty ahead of US CPI and Fed policy

EUR/USD tumbles to 1.0750 due to weak Euro amid political uncertainty and firm US Dollar (USD) as strong United States (US) labor market data has diminished market expectations for the Federal Reserve (Fed) to start reducing interest rates from their current levels in the September meeting. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends recovery to an almost four-week high near 105.30.
The CME FedWatch tool shows that 30-Day Fed Funds futures pricing data suggest a 47% chance that interest rate will be lower than the current level in September, significantly down from the 59.6% recorded a week ago.
The US Nonfarm Payrolls (NFP) report for May showed on Friday that fresh recruitments came in at 272K, higher than expectations of 185K and the prior release of 165K. Labor demand remaining stronger than expected continues to buy more time for Fed policymakers to maintain their current interest rate framework.
Average Hourly Earnings data, a measure of wage inflation that dictates households’ spending, came higher than expected. Annual wage inflation measures accelerated to 4.1% in May from the consensus of 3.9% and April’s read of 4.0%. On a month-on-month basis, wage inflation measures rose strongly by 0.4% from the estimates of 0.3% and the former release of 0.2%.
Meanwhile, investors shift their focus to the US Consumer Price Index (CPI) data for May and the Fed’s monetary policy decision, which are scheduled for Wednesday. The Fed is widely anticipated to maintain interest rates steady in the range of 5.25%-5.50% with a hawkish outlook as the last mile for inflation to return to the desired rate of 2% appears to be stickier.

Technical Analysis: EUR/USD dives below 200-DEMA

EUR/USD returns inside the Symmetrical Triangle formation on a daily timeframe after failing to hold the breakout move, suggesting that the move was fake and the overall trend has turned bearish. The major currency pair is expected to find support near the upward-sloping trendline of the above-mentioned chart pattern, plotted from October 3, 2023, low at 1.0448, near 1.0636.

The pair’s long-term outlook has also turned negative as it drops below the 200-day Exponential Moving Average (EMA), which trades around 1.0800.

The 14-period Relative Strength Index (RSI) falls sharply to 40.00. A decisive break below that level would trigger a bearish momentum.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).