Euro Relief Rally Fades as Traders Brace for French Election Volatility
Tuesday, 18 June, Week 25: This report provides a Forex market analysis for EUR/USD, GBP/USD, and USD/JPY, covering the past five weeks' performance, long-term (five-week) and short-term (five-day) outlooks, and relevant upcoming risk events. The report also analyses key geopolitical situations and market themes influencing financial markets, including political uncertainty in France, the Israel-Hamas conflict, and monetary policy divergence. Additionally, it highlights other notable news and concludes with a summary of findings for Forex traders.
EUR/USD
The EUR/USD has been under pressure for the past five weeks, falling from around 1.09 to 1.07. This weakness is primarily attributed to political uncertainty in France, where the far-right National Rally is leading polls ahead of the June 30th parliamentary elections. The prospect of a National Rally victory has sparked concerns about France's fiscal stability and its commitment to EU integration, weighing on the euro.
Long-term (five-weeks) outlook: The EUR/USD could find support if the French parliamentary elections result in a Macron victory or a coalition government led by pro-EU parties. This would ease concerns about political and fiscal instability in France, potentially boosting the euro. Additionally, weaker-than-expected US economic data could raise expectations for a Fed rate cut sooner than anticipated, weighing on the dollar and supporting the euro. Conversely, the EUR/USD could come under renewed pressure if the National Rally secures a decisive victory in the French elections, triggering risk aversion and a flight to safety. Stronger-than-expected US economic data could also support the dollar and weigh on the euro. A mixed outcome in the French elections, combined with mixed US economic data, could lead to range-bound trading.
The most likely long-term outlook for EUR/USD is for continued volatility and potential downside pressure. The National Rally's strong showing in the recent European Parliament elections suggests that the party could make significant gains in the upcoming parliamentary elections. A National Rally victory or a hung parliament would likely increase political and fiscal uncertainty in France, weighing on the euro. Additionally, the US economy remains relatively robust, and the Fed has signalled a hawkish stance on monetary policy, suggesting continued support for the dollar. The Trading Economics forecast for EUR/USD is 1.08094 by the end of this quarter, implying a modest rebound from current levels. However, this forecast is subject to significant uncertainty, given the political risks in France and the evolving outlook for US monetary policy.
Short-term (five-days) outlook: The EUR/USD could find some support in the short term if upcoming US economic data, particularly retail sales and industrial production, disappoints. This could raise expectations for a Fed rate cut sooner than anticipated, weighing on the dollar. A lower-than-expected final reading for the Euro Area inflation rate for May could also support the euro. Conversely, the EUR/USD could come under pressure if US economic data surprises to the upside, reinforcing the Fed's hawkish stance. A higher-than-expected final reading for the Euro Area inflation rate could also weigh on the euro. Additionally, any signs of escalating tensions in the Israel-Hamas conflict could boost safe-haven demand for the dollar, weighing on the euro.
The short-term outlook for EUR/USD is likely to be dominated by the release of US economic data, the final Euro Area inflation reading, and developments in the French political landscape. The most likely scenario is for range-bound trading, with the potential for downside pressure if US data surprises to the upside or French political risks intensify. This aligns with the long-term outlook, which suggests continued volatility and potential downside pressure for the euro.
Tuesday, 18 June: EA HICP Final (May), US Retail Sales (May), US Industrial Production (May)
Wednesday, 19 June: US Housing Starts (May), US Building Permits (May), FOMC Minutes
Thursday, 20 June: US Initial Jobless Claims, Philadelphia Fed Manufacturing Index (June)
Friday, 21 June: US S&P Global Manufacturing PMI (June), US S&P Global Services PMI (June)
GBP/USD
The GBP/USD has been volatile over the past five weeks, initially strengthening on hopes for a BoE rate hike but then weakening as political uncertainty in Europe and concerns about the UK's economic outlook weighed on sentiment. The pound has fallen from around 1.28 to 1.267.
Long-term (five-weeks) outlook: The GBP/USD could find support if the BoE signals a more hawkish stance at its June 20th meeting, for example by indicating that it is prepared to raise rates further. Stronger-than-expected UK economic data, particularly on inflation and wage growth, could also boost the pound. Additionally, a resolution of political uncertainty in Europe could improve investor sentiment towards the UK and support the pound. Conversely, the GBP/USD could come under pressure if the BoE signals a more dovish stance, for example by indicating that it is prepared to cut rates sooner than expected. Weaker-than-expected UK economic data, particularly on growth, could also weigh on the pound. Additionally, a further escalation of geopolitical risks could boost the US dollar and weigh on the pound. A mixed outcome from the BoE meeting, combined with mixed UK economic data and continued political uncertainty in Europe, could lead to range-bound trading.
The most likely long-term outlook for GBP/USD is for continued volatility and potential downside pressure. While the UK economy has shown some signs of resilience, the outlook remains uncertain, with risks stemming from high inflation, rising interest rates, and the ongoing impact of Brexit. The BoE's policy path is also unclear, with the market divided on whether the central bank will raise rates further or begin cutting rates later this year. Additionally, political uncertainty in Europe, particularly in France, is weighing on investor sentiment towards the UK. The Trading Economics forecast for GBP/USD is 1.26961 by the end of this quarter, suggesting limited upside potential from current levels. This forecast aligns with the view that the pound is likely to remain under pressure in the coming weeks.
Short-term (five-days) outlook: The GBP/USD could find some support in the short term if the UK CPI data for May, released on Wednesday, surprises to the upside, reinforcing expectations for a BoE rate hike. Conversely, the GBP/USD could come under pressure if the BoE signals a more dovish stance at its meeting on Thursday or if UK economic data disappoints. Additionally, any signs of escalating tensions in the Israel-Hamas conflict could boost safe-haven demand for the dollar, weighing on the pound.
The short-term outlook for GBP/USD is likely to be dominated by the BoE's policy announcement on Thursday and the release of UK CPI data on Wednesday. The most likely scenario is for range-bound trading ahead of these events, with the potential for a sharp move in either direction depending on the outcomes. This aligns with the long-term outlook, which suggests continued volatility for the pound.
Wednesday, 19 June: UK CPI (May)
Thursday, 20 June: Bank of England Interest Rate Decision
Friday, 21 June: UK Retail Sales (May)
USD/JPY
The USD/JPY has been on an uptrend for the past five weeks, rising from around 155 to above 157. This strength is primarily driven by the widening interest rate differential between the US and Japan, with the Fed signalling a hawkish stance while the BoJ remains committed to its ultra-loose monetary policy.
Long-term (five-weeks) outlook: The USD/JPY could find further support if the BoJ maintains its accommodative stance at its July meeting and US economic data continues to support the Fed's hawkish outlook. A further escalation of geopolitical risks could also boost the US dollar and weigh on the yen. Conversely, the USD/JPY could come under pressure if the BoJ surprises the market with a hawkish shift in policy, for example by raising interest rates or announcing a more aggressive plan for reducing bond purchases. Weaker-than-expected US economic data could also weigh on the dollar and support the yen. A mixed outcome from the BoJ meeting, combined with mixed US economic data and a de-escalation of geopolitical tensions, could lead to range-bound trading.
The most likely long-term outlook for USD/JPY is for continued strength, with the potential for a pullback if the BoJ signals a hawkish shift in policy or if US economic data disappoints. The divergence in monetary policy between the Fed and the BoJ is likely to remain a key driver of USD/JPY strength in the coming weeks. The Fed has signalled its intention to keep interest rates elevated for some time to combat inflation, while the BoJ remains committed to its ultra-loose monetary policy to support the Japanese economy. This policy divergence is likely to continue to widen the interest rate differential between the two countries, making the dollar more attractive to investors. The Trading Economics forecast for USD/JPY is 157.995 by the end of this quarter, suggesting further upside potential from current levels. This forecast aligns with the view that the USD/JPY is likely to remain strong in the coming weeks.
Short-term (five-days) outlook: The USD/JPY could find support in the short term if US retail sales and industrial production data for May, released on Tuesday, surprise to the upside, reinforcing the Fed's hawkish stance. Conversely, the USD/JPY could come under pressure if US economic data disappoints or if there are signs of easing geopolitical tensions.
The short-term outlook for USD/JPY is likely to be dominated by the release of US economic data and developments in the broader risk environment. The most likely scenario is for continued USD/JPY strength, with the potential for a pullback if US data disappoints or geopolitical risks ease. This aligns with the long-term outlook, which suggests continued strength for the USD/JPY.
Tuesday, 18 June: US Retail Sales (May), US Industrial Production (May)
Wednesday, 19 June: US Housing Starts (May), US Building Permits (May), FOMC Minutes
Thursday, 20 June: US Initial Jobless Claims, Philadelphia Fed Manufacturing Index (June), Bank of Japan Monetary Policy Meeting Minutes
Friday, 21 June: US S&P Global Manufacturing PMI (June), US S&P Global Services PMI (June)
Geopolitics and Market Themes
Political Uncertainty in France
Synopsis: Political instability in France following the European Parliament elections is raising concerns about fiscal stability and the country's ability to implement reforms. The prospect of a far-right victory in the upcoming parliamentary elections is adding to market uncertainty.
Key Developments:
French President Macron called for snap legislative elections after the far-right National Rally's strong performance in the EU elections.
The gap between French and German bond yields has widened, reflecting concerns about France's fiscal outlook.
European equities have declined as investors assess the potential for political instability in France.
Market Impact:
The euro has weakened against the dollar, reflecting concerns about political and fiscal risks in France.
French bond yields have risen, while German bund yields have fallen as investors seek safe-haven assets.
European equities are facing headwinds from political uncertainty, particularly in the financial sector.
Israel-Hamas Conflict
Synopsis: The ongoing conflict between Israel and Hamas is contributing to heightened geopolitical risk aversion, supporting safe-haven assets like the US dollar and weighing on risk-sensitive currencies like the yen and the pound.
Key Developments:
Israel's military has announced a daily tactical pause in operations near a crossing into Gaza for humanitarian purposes.
Hamas leader Ismail Haniyeh has stated that the group's response to the latest Gaza ceasefire proposal aligns with the principles of US President Joe Biden's plan.
Hezbollah has launched a barrage of rockets into northern Israel in retaliation for the killing of a senior commander by Israel.
The White House has announced that Qatar and Egypt plan to hold talks with Hamas regarding a Gaza ceasefire.
Market Impact:
The conflict has contributed to a flight to safety, boosting the US dollar and weighing on the yen and the pound.
Concerns about potential disruptions to oil supplies from the Middle East have supported oil prices, which could have a negative impact on the Japanese economy, a major oil importer.
Monetary Policy Divergence
Synopsis: The divergence in monetary policy between the US Federal Reserve and other central banks, such as the Bank of Japan and the European Central Bank, is creating volatility in currency markets. The Fed's hawkish stance, signalling only one rate cut this year, contrasts with easing policies in other regions.
Key Developments:
The Federal Reserve left interest rates unchanged in June but revised its inflation forecasts upwards, projecting only one rate cut this year.
The European Central Bank cut interest rates by 25bps, marking a shift from its previous stance of holding rates steady.
The Bank of Japan maintained its ultra-loose monetary policy, defying market expectations for a move towards tightening.
Market Impact:
The US dollar has strengthened against most major currencies, as the Fed's hawkish stance contrasts with easing policies in other regions.
US Treasury yields have fallen as investors anticipate potential rate cuts later this year.
The Japanese yen has weakened to multi-decade lows against the dollar, reflecting the divergence in monetary policy between the Fed and the BOJ.
OTHER NEWS
China Launches Anti-Dumping Probe into European Pork: China's Commerce Ministry announced an anti-dumping investigation into pork imports from the European Union. This move is seen as retaliation for the EU's recent imposition of anti-subsidy duties on Chinese electric vehicles. The investigation could potentially lead to higher tariffs on European pork, impacting trade flows and potentially benefiting pork exporters from other regions.
France's Snap Election Raises Concerns About Fiscal Stability: The prospect of a far-right victory in France's upcoming parliamentary elections has sparked concerns about the country's fiscal stability. The National Rally has proposed policies such as cutting sales taxes and reducing the retirement age, which could lead to increased government spending and higher debt levels. These concerns have contributed to a widening of the gap between French and German bond yields, reflecting investors' unease about France's economic outlook.
Conclusion
The Forex market is currently navigating a complex landscape characterised by political uncertainty in Europe, geopolitical tensions in the Middle East, and monetary policy divergence between major central banks. The upcoming French parliamentary elections, the BoE's policy announcement, and the BoJ's July meeting will be key events to watch in the coming weeks.
For Forex traders, the current environment presents both opportunities and risks. The volatility in currency markets creates potential for profitable trades, but it also increases the importance of careful risk management. Traders should closely monitor economic data releases, central bank communications, and geopolitical developments to stay ahead of market moves.
References
Bank of England: https://www.bankofengland.co.uk
Bank of Japan: https://www.boj.or.jp/en
Bloomberg: https://www.bloomberg.com
Bureau of Economic Analysis: https://www.bea.gov
Cabinet Office, Japan: https://www8.cao.go.jp
Confederation of British Industry (CBI): https://www.cbi.org.uk
European Central Bank: https://www.ecb.europa.eu
Eurostat: https://ec.europa.eu/eurostat
Federal Reserve: https://www.federalreserve.gov
Financial Times: https://www.ft.com