Euro Under Pressure as French Elections Loom, Dollar Strengthens on Hawkish Fed
Monday, 17 June, Week 25: This report provides a comprehensive analysis of the Forex market, focusing on the DXY and major currency pairs (EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, NZD/USD). It examines the five-week performance of each currency pair, provides long-term (five-week) and short-term (five-day) outlooks, and highlights upcoming risk events. The report also delves into key geopolitical and market themes influencing the financial markets.
DXY
The DXY has exhibited a strong upward trend over the past five weeks, gaining approximately 2.5%. This surge is primarily attributed to the Federal Reserve's hawkish stance on monetary policy, signalling a commitment to maintaining higher interest rates for an extended period to combat inflation. The recent release of robust US economic data, particularly strong jobs numbers, has further bolstered the dollar's appeal as a safe-haven asset.
Long-Term Outlook (Five-Weeks)
Upward Support: The DXY is likely to find continued support to the upside if US economic data remains strong, reinforcing the Fed's hawkish stance. Further escalation of geopolitical tensions, particularly the Israel-Hamas war or the Ukraine conflict, could also boost safe-haven demand for the dollar.
Indifference: The DXY could trade sideways if US economic data comes in mixed, providing no clear direction for the Fed's monetary policy. A stalemate in the French parliamentary elections, with no clear winner emerging, could also lead to a period of consolidation for the dollar.
Downside Pressure: The DXY could come under downside pressure if US economic data disappoints, raising expectations for a Fed rate cut sooner than anticipated. A decisive victory for pro-EU parties in the French elections, easing concerns about political and fiscal instability in France, could also weigh on the dollar.
The current market sentiment and the factors outlined above suggest that the DXY is likely to remain strong in the coming weeks.
Short-Term Outlook (Five-Days)
Upward Support: In the short term, the DXY could find support from positive US economic data releases, such as retail sales and industrial production data due this week. Hawkish comments from Fed officials could also boost the dollar.
Indifference: The DXY could trade sideways if US economic data releases are in line with expectations or if there are no major geopolitical developments.
Downside Pressure: The DXY could come under pressure if US economic data releases disappoint or if there are signs of de-escalation in geopolitical tensions.
The short-term outlook for the DXY is aligned with the long-term outlook, with the dollar expected to remain strong in the coming days.
Upcoming Risk Events
June 18 (Tuesday): US Retail Sales MM (May), US Industrial Production MM (May), US Capacity Utilization SA (May)
June 19 (Wednesday): US NAHB Housing Market Index (Jun)
June 20 (Thursday): US Building Permits: Number (May), US Housing Starts Number (May), US Initial Jobless Claims (15 Jun, w/e), US Philly Fed Business Index (Jun)
June 21 (Friday): US S&P Global Manufacturing PMI Flash (Jun), US S&P Global Services PMI Flash (Jun), US Existing Home Sales (May), US Leading Index Change MM (May)
EUR/USD
The EUR/USD has depreciated sharply over the last four weeks, losing 1.46%. This depreciation is largely attributed to the political turmoil in Europe, particularly the uncertainty surrounding the French parliamentary elections, and the divergence in monetary policy between the Federal Reserve and the European Central Bank.
Long-Term Outlook (Five-Weeks)
Upward Support: The EUR/USD could find upward support if the French parliamentary elections result in a decisive victory for pro-EU parties, easing concerns about political and fiscal instability in France. Signs of a more hawkish ECB, potentially driven by stronger-than-expected Eurozone economic data, could also support the euro.
Indifference: The EUR/USD could trade sideways if the French elections result in a mixed outcome, with no clear winner emerging. Mixed Eurozone economic data, providing no clear direction for the ECB's monetary policy, could also lead to range-bound trading in the pair.
Downside Pressure: The EUR/USD could come under downside pressure if the French elections result in a victory for the far-right National Rally, triggering risk aversion and a flight to safety. Weaker-than-expected Eurozone economic data, raising expectations for further ECB rate cuts, could also weigh on the euro.
The Trading Economics forecast for the EUR/USD at the end of the quarter is 1.08094, suggesting further depreciation. This aligns with the current market sentiment and the potential for continued political uncertainty in France.
Short-Term Outlook (Five-Days)
Upward Support: In the short term, the EUR/USD could find support from positive Eurozone economic data releases, such as the ZEW Survey Expectations and the German ZEW Economic Sentiment, due this week. Dovish comments from Fed officials could also provide a boost to the euro.
Indifference: The EUR/USD could trade sideways if Eurozone economic data releases are in line with expectations or if there are no major developments in the French election campaign.
Downside Pressure: The EUR/USD could come under pressure if Eurozone economic data releases disappoint or if there are signs of increasing support for the far-right in France.
The short-term outlook for the EUR/USD is aligned with the long-term outlook, with the euro facing downside risks in the coming days.
Upcoming Risk Events
June 18 (Tuesday): HICP Final MM (May), HICP Final YY (May), ZEW Survey Expectations (Jun), GE ZEW Economic Sentiment (Jun)
June 19 (Wednesday): Current Account NSA, EUR (Apr), CPI MM (May), CPI YY (May)
June 20 (Thursday): Consumer Confidence Flash (Jun), Economic Bulletin Issue 4/2024
June 21 (Friday): HCOB Manufacturing Flash PMI (Jun), HCOB Services Flash PMI (Jun), HCOB Composite Flash PMI (Jun)
GBP/USD
The GBP/USD has been relatively stable over the last four weeks, losing a marginal 0.30%. The pair has been influenced by the divergence in monetary policy between the Federal Reserve and the Bank of England, as well as political uncertainty surrounding the upcoming UK general election.
Long-Term Outlook (Five-Weeks)
Upward Support: The GBP/USD could find upward support if the Bank of England signals a more hawkish stance on monetary policy, potentially driven by concerns about persistent inflation or stronger-than-expected UK economic data. A decisive victory for the Conservative Party in the UK general election, reducing political uncertainty, could also boost the pound.
Indifference: The GBP/USD could trade sideways if the Bank of England maintains its current policy stance, with no clear signals about the future path of interest rates. Mixed UK economic data, providing no clear direction for the BoE's monetary policy, could also lead to range-bound trading in the pair.
Downside Pressure: The GBP/USD could come under downside pressure if the Bank of England signals a more dovish stance on monetary policy, potentially driven by concerns about slowing economic growth or easing inflationary pressures. A hung parliament or a victory for the Labour Party in the UK general election, increasing political uncertainty, could also weigh on the pound.
The Trading Economics forecast for the GBP/USD at the end of the quarter is 1.26961, suggesting a slight appreciation. This forecast is based on the assumption that the BoE will maintain its current policy stance and that the UK economy will continue to grow at a modest pace.
Short-Term Outlook (Five-Days)
Upward Support: In the short term, the GBP/USD could find support from positive UK economic data releases, such as the GfK Consumer Confidence and retail sales data, due this week. Hawkish comments from BoE officials could also boost the pound.
Indifference: The GBP/USD could trade sideways if UK economic data releases are in line with expectations or if there are no major developments in the UK general election campaign.
Downside Pressure: The GBP/USD could come under pressure if UK economic data releases disappoint or if there are signs of increasing political uncertainty in the UK.
The short-term outlook for the GBP/USD is aligned with the long-term outlook, with the pound expected to remain relatively stable in the coming days.
Upcoming Risk Events
June 19 (Wednesday): Core CPI MM (May), Core CPI YY (May), CPI MM (May), CPI YY (May)
June 20 (Thursday): BOE MPC Vote Hike (Jun), BOE MPC Vote Unchanged (Jun), BOE MPC Vote Cut (Jun), BOE Bank Rate (Jun)
June 21 (Friday): GfK Consumer Confidence (Jun), Retail Sales MM (May), Retail Sales Excluding Fuel MM (May)
USD/JPY
The USD/JPY has appreciated by 0.65% over the last four weeks, driven by the widening interest rate differential between the US and Japan. The Bank of Japan maintained its ultra-loose monetary policy in June, keeping interest rates unchanged and stating that it will maintain its current pace of Japanese government bond purchases. However, the BOJ added that it will release a plan on winding down its bond buying program at its next policy meeting in July.
Long-Term Outlook (Five-Weeks)
Upward Support: The USD/JPY is likely to find continued support to the upside if the interest rate differential between the US and Japan continues to widen. This could occur if the Fed maintains its hawkish stance while the BOJ remains dovish. Stronger-than-expected US economic data could also boost the dollar against the yen.
Indifference: The USD/JPY could trade sideways if the interest rate differential between the US and Japan stabilises. This could occur if the Fed signals a pause in its rate hiking cycle or if the BOJ hints at a potential shift towards policy normalisation.
Downside Pressure: The USD/JPY could come under downside pressure if the interest rate differential between the US and Japan narrows. This could occur if the Fed cuts interest rates sooner than expected or if the BOJ surprises the market with a hawkish policy shift. Weaker-than-expected US economic data could also weigh on the dollar against the yen.
The Trading Economics forecast for the USD/JPY at the end of the quarter is 157.995, suggesting further appreciation. This aligns with the current market sentiment and the expectation of a continued widening interest rate differential between the US and Japan.
Short-Term Outlook (Five-Days)
Upward Support: In the short term, the USD/JPY could find support from positive US economic data releases, such as retail sales and industrial production data due this week. Hawkish comments from Fed officials could also boost the dollar against the yen.
Indifference: The USD/JPY could trade sideways if US economic data releases are in line with expectations or if there are no major developments in US-Japan monetary policy divergence.
Downside Pressure: The USD/JPY could come under pressure if US economic data releases disappoint or if there are signs of a potential shift towards policy normalisation by the BOJ.
The short-term outlook for the USD/JPY is aligned with the long-term outlook, with the dollar expected to remain strong against the yen in the coming days.
Upcoming Risk Events
June 18 (Tuesday): RBA Cash Rate (Jun)
June 19 (Wednesday): BoJ Minutes (Apr), Exports YY (May), Imports YY (May), Trade Balance Total Yen (May)
June 20 (Thursday): Foreign Bond Investment (15 Jun, w/e), Foreign Invest JP Stock (15 Jun, w/e), Foreign Invest JP Bonds (15 Jun, w/e), Foreign Stock Investment (15 Jun, w/e)
June 21 (Friday): CPI, Core Nationwide YY (May), CPI, Overall Nationwide (May), CPI MM NSA (May), JibunBK Manufacturing PMI Flash SA (Jun), JibunBK Composite Flash SA (Jun), JibunBK Services PMI Flash SA (Jun)
Geopolitics and Market Themes
Ukraine Peace Summit
Synopsis: World leaders are meeting in Switzerland to discuss potential pathways to peace in Ukraine. Russia is not attending the summit, and Ukraine has already rejected a proposal from Russian President Vladimir Putin that would see Kyiv cede four eastern provinces to Russia and drop its ambition to join NATO. China is also not attending the summit, despite lobbying from the United States and others, and is pushing a rival peace plan.
Key Developments:
Russia is not attending the summit.
Ukraine has rejected Putin’s peace proposal.
China is not attending the summit and is pushing a rival peace plan.
Assessment: The absence of Russia and China from the summit suggests that a breakthrough in peace negotiations is unlikely. The summit could still provide an opportunity for Ukraine and its allies to coordinate their strategy and present a united front against Russia.
Israel-Hamas War
Synopsis: Israel’s war against Hamas is escalating, with Israeli forces now reoccupying Gaza. The conflict has raised concerns about a wider regional war, as Iran-backed Hezbollah has launched rocket attacks on Israel from Lebanon.
Key Developments:
Israel has reoccupied Gaza.
Hezbollah has launched rocket attacks on Israel from Lebanon.
The United States and Arab states are calling for a ceasefire.
Assessment: The escalation of the Israel-Hamas war is raising geopolitical risks in the Middle East. The conflict is also disrupting global shipping, as many shipping companies are avoiding the Red Sea due to the risk of Houthi attacks.
U.S. Presidential Election
Synopsis: The U.S. presidential election is heating up, with former President Donald Trump focusing his campaign on attacking President Joe Biden. Trump is working to convince House Republicans to oppose any measures supported by Biden, particularly on foreign and border policy.
Key Developments:
Trump is focusing his campaign on attacking Biden.
Trump is working to convince House Republicans to oppose Biden’s agenda.
Trump’s first criminal trial is likely to begin this quarter.
Assessment: The U.S. presidential election is increasing political uncertainty in the United States. Trump’s efforts to obstruct Biden’s agenda could make it harder for the United States to provide aid to Ukraine and address the immigration crisis at the border.
European Parliament Elections
Synopsis: Elections for the European Parliament will take place June 6-9. Opinion polls indicate that right-wing and far-right parties will make significant gains across several EU countries, but that the current grand coalition of center-right and center-left forces will retain its majority.
Key Developments:
Right-wing and far-right parties are expected to make gains.
The current grand coalition is expected to retain its majority.
The new European Parliament will elect a new European Commission.
Assessment: The European Parliament elections will shape the political direction of the European Union for the next five years. A more conservative parliament could lead to a shift in EU policy on issues such as climate change, migration, and the economy.
Conclusion
The Forex market is currently being driven by a combination of factors, including monetary policy divergence, political uncertainty, and geopolitical tensions. The US dollar is expected to remain strong in the coming weeks, supported by a hawkish Fed and robust US economic data. The euro is facing downside risks due to political uncertainty in France, while the British pound is expected to remain relatively stable. The Japanese yen is likely to weaken further against the US dollar as the interest rate differential between the two countries continues to widen.
Forex traders should closely monitor upcoming economic data releases and central bank announcements for clues about the future direction of monetary policy. Geopolitical developments, particularly the Ukraine peace summit and the Israel-Hamas war, should also be closely watched, as they could trigger sharp moves in currency markets.
References
Trading Economics: https://tradingeconomics.com/
Reuters: https://www.reuters.com/
Federal Reserve: https://www.federalreserve.gov/
European Central Bank: https://www.ecb.europa.eu/
Bank of England: https://www.bankofengland.co.uk/
Bank of Japan: https://www.boj.or.jp/en
U.S. Bureau of Labor Statistics: https://www.bls.gov/
EUROSTAT: https://ec.europa.eu/eurostat/en/
Office for National Statistics: https://www.ons.gov.uk/
Statistics Bureau of Japan: https://www.stat.go.jp/english/index.html
Ministry of Internal Affairs & Communications, Japan: https://www.soumu.go.jp/english/
Ministry of Finance, Japan: https://www.mof.go.jp/english/