Summary:

At present, the French election is the main driver of EUR/USD, and the associated political risk is increasing. Most outcomes predict that Macron will lose his majority, which will further weigh on the euro. In contrast, the Fed kept rates unchanged in June, raised its inflation outlook, and signaled only one rate cut in 2024. Chair Powell emphasized the need for more evidence of inflation deceleration, which could boost the USD as rate cut expectations adjust.

EUR/USD 4H

Macro View:

EUR: Since French President Emmanuel Macron called for a snap parliamentary election following the poor performance of his centrist coalition in the European Parliament election, the French political landscape has entered a tumultuous state. The election outcome remains difficult to predict as political negotiations will continue behind the scenes until the second round. Markets believe that the most likely outcome of the election is a period of political deadlock in France, increasing uncertainty about the future trajectory of the country’s public finances.

Overall, Macron’s decision raises the risk of France experiencing a political stalemate, where the limits of the constitution may be tested, further heightening uncertainty about public finances. Consequently, the French elections are currently the main driver for EUR/USD. EUR/USD might fall again to 1.06 and below if a hung parliament emerges from the French vote, and potentially break through 1.05 if the National Rally (RN) gains a clear majority after the second round on 7 July. In contrast, if President Macron’s alliance holds a majority (a very unlikely scenario according to the latest polls), EUR/USD will likely rise back above 1.09.

USD: In June, the Federal Reserve kept interest rates unchanged but raised its inflation outlook while maintaining its growth outlook. Consequently, the Fed revised its rate outlook, with the updated dot plot indicating only one rate cut in 2024, a more hawkish stance compared to the May meeting. Chair Powell emphasized that the Federal Open Market Committee (FOMC) is not yet ready to cut rates, despite welcoming the softer-than-expected CPI data for May. He stressed that the Fed is data-dependent and wants more evidence of inflation deceleration before easing policy. Since US rate market expectations have not fully aligned with the updated Fed dot plot, the USD could benefit as rate cut expectations are adjusted further.

FX View:

DXM: A Tool to Gauge Retail Sentiments

EUR/USD Current Retail Long/Short Position

The DXM shows that 56% of traders are bullish, while the remaining 44% are bearish, reflecting the predominant retail sentiment. This sentiment offers a contrasting trading opportunity since retail traders tend to consistently lose money in the long term.

Seasonality Analysis: The Historical Movement of the Currencies  

EUR Futures’ seasonality movement

The seasonal pattern for the EUR suggests bearish momentum in the near term.

USD Futures’ seasonality movement

The seasonal pattern for the USD suggests bullish momentum in the near term.

Sources: Prime Market Terminal

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