Snap elections in France and UK parliament elections impact the monetary policy of the ECB and the Bank of England. However, the results for the euro and pound are exactly the opposite. Let’s discuss it and make a trading plan for the EURUSD.
Weekly fundamental forecast for euro
Shoot first, think later – such is the market mentality. Now that a few days have passed, we can soberly assess May’s impressive US jobs statistics and the massive selling of European assets amid snap elections in France. Emmanuel Macron’s decision may turn out correct, and the slowdown in US inflation will allow the EURUSD bulls to lick their wounds. Too late. The gun has already been fired.
The euro rebounded from five-week lows as the release of US CPI data, followed by the Fed’s forecast for the federal funds rate, were highly significant events to close a part of positions. Hedge funds turned net bullish on the euro for the first time since August and were punished for their overconfidence.
Dynamics of speculative positions in euro
Source: Bloomberg.
Few people now want to make hasty decisions, anticipating whether US inflation will slow or accelerate. This will undoubtedly affect the dot plot. If consumer price growth slows, officials will most likely forecast two acts of monetary expansion before the end of 2024; if it slows, we will see only one. In this case, September’s rate cut odds will drop sharply, and the market will begin to wonder whether the Fed will ease monetary policy this year.
With the economy remaining strong and inflation anchored above target, the central bank’s best decision would be to do nothing. The rhetoric of FOMC officials suggests the Fed decided to have summer holidays and get more data to make important decisions. At the same time, the political heat makes the world’s leading regulators even more patient. No one wants to cut rates ahead of the elections not to be accused of supporting the current government.
Moreover, Great Britain, France, and the USA may see dramatic changes in their political environment. However, while Labour’s victory over the Conservatives is perceived as a boon for the pound, the Eurosceptic occupation of the National Assembly is a worrying sign for investors. If they formed a government, spending issues could give rise to a conflict between Paris and Brussels. Pictet Wealth Management said such a scenario would provoke an economic disaster in France. Unsurprisingly, the euro’s volatility has soared, while the EURUSD‘s reversal risks have fallen, indicating bearish market sentiment.
Euro reversal risks
Source: Bloomberg.
RBC Capital Markets predicts the main currency pair will fall to 1.05 in the third quarter, while Union Bancaire Privee sees the euro under pressure over the next three weeks. Credit Agricole notes that further growth of the bond yield differential between France and Germany will drive sales of the EURUSD.
Weekly trading plan for EURUSD
However, the main currency pair must first withstand the test of US inflation and the Fed’s meeting. Acceleration of consumer prices will catalyze the EURUSD‘s slump towards 1.06, while a slowdown will allow the euro to return to $1.08. We need to wait.
Price chart of EURUSD in real time mode
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