Weekly EurUsd Outlook July 8, 2024 – French Vote Shakes Markets

• This past week in the US has seen limited new developments as the minutes from the latest Federal Reserve meeting confirmed there are currently no plans to cut interest rates. The June employment report met expectations with over 200,000 new jobs created, though some ISM indicators were weak.
• Following the French elections, which unexpectedly resulted in a leftist victory, the market is now pondering the future of European politics and the upcoming decisions of the European Central Bank (ECB) this summer. A stalemate seems the most likely scenario.
• The EurUsd has rebounded from its supports, positioning itself in the middle of the range that has characterized its trajectory for months. The focus is primarily on the resistance at 1.10.

Market Response to French Elections and Global Economic Tensions

The immediate market reaction to the French electoral outcome was not disastrous for the euro; instead, it attempted a recovery that not only reclaimed the 200-day moving average but also exceeded it.

French bonds have somewhat recouped losses from previous days, spurred by fears of a right-wing majority government that could have caused significant budgetary upheaval for French government bonds (OATs). However, it remains a fact that the country is divided into three political factions, making governance challenging.

Across the Atlantic, there’s burgeoning sentiment that a potential Trump victory in November would be inflation-friendly, due to spending policies and tariffs imposed by the tycoon. Not coincidentally, Treasury yields have approached 4.5%, driving all global interest rate curves.

Fed minutes have reiterated there is no rush to lower rates. Concrete data is needed to confirm that the convergence towards 2% inflation is solid. Mere sentiment is not enough. The anticipated labor market report resulted in a lackluster post-July 4 session. Over 200,000 jobs were created, although unemployment slightly increased.

In this context, witnessing a significant shift in the status quo is challenging, with Japan continuing to suffer from very low yields, a monetary policy reluctant to raise rates, and a debt-to-GDP ratio over 250%. We’ve discussed Europe, while in the UK, the political elections have led to a Labour victory facing less than stellar fiscal fundamentals.

Any potential weakness in the dollar seems curtailed by the lackluster performance of its competitors.

Technical Analysis: EurUsd’s Resilient Rally and Key Resistance Challenges

EurUsd’s reaction post the French vote was notably strong, as if markets breathed a sigh of relief. EurUsd briefly dipped below 1.07, tested the support line, and then decisively climbed, surpassing the 200-day moving average. There is room to rise and continue this exhausting trading range, potentially reaching projections around 1.10. However, overcoming the bearish downtrend line that connects the decreasing highs from December 2023 is a prerequisite.

The euro’s latest surge has distanced it from significant supports and reopened the upper side of the trading range. The 1.10 mark represents a very solid and intriguing resistance level, beyond which could alter perspectives for the coming months. Here, the bearish trend line connecting the decreasing highs of 2023 crosses, and here EurUsd could test the resolve of US dollar buyers to continue holding long positions on the greenback. This technical transition would be very delicate.