The EUR/USD pair opened with a price gap on Monday, dropping to a one-month low, extending Friday’s 0.8% decline—the biggest single-day loss since April 12. It is trading at 1.07456, weakened by political uncertainty in the Eurozone after French President Emmanuel Macron called for early elections, significantly impacting the euro.
Macron’s unexpected move on Sunday evening followed polls indicating that the far-right National Rally party, led by Marine Le Pen and party head Jordan Bardella, secured 32%-33% of seats in the European Parliament elections, further weakening Macron’s centrist coalition.
Additionally, the euro declined due to stronger-than-expected US non-farm payroll data, bolstering expectations that the Federal Reserve may keep interest rates unchanged for an extended period. This comes ahead of the Federal Open Market Committee meeting this week, with most economists predicting the first rate cut in November, continuing the dollar’s rise.
The surprising results of the European Parliament elections and Macron’s decision to call for early parliamentary elections have increased pressure on the euro in early Monday trading. The US dollar remains strong, while the euro struggles to find demand as markets assess the initial results of the European Parliament elections. The only significant European economic data today is the Sentix Investor Confidence Index for June. The US economic calendar won’t provide any high-impact data before Wednesday’s key Consumer Price Index figures and the Federal Reserve’s monetary policy announcements.
Robust US labour market data has driven up US Treasury yields, boosting the dollar. The 10-year US Treasury yield rose over 3% on Friday, and the US Dollar Index increased by 0.8%, ending the week in positive territory. Today, the index continued to rise, trading at its highest level since mid-May, slightly above 105.20. US stock index futures are trading slightly lower today after modest losses on Friday.
French President Emmanuel Macron stated that far-right parties are gaining across Europe and called for early elections after the National Rally secured 31.5% of the votes, compared to 14.5% for the “Besoin d’Europe” alliance, which includes Macron’s Renaissance party.
Market reactions included a more than 1% drop in the Euro Stoxx 50 at the start of the European session, a 0.6% decline in Germany’s DAX 30, and a more than 1.5% fall in France’s CAC 40. Meanwhile, the euro struggles against its rivals, with EUR/USD trading in negative territory just above 1.0750.
On the monetary policy front, ECB policymaker and Bundesbank President Joachim Nagel warned about persistent inflation expectations, especially in the services sector due to strong wage growth. Concerns about entrenched inflation suggest that easing policies will be gradual.
The ECB stated it should not rush to cut interest rates again, as progress in fighting inflation might be challenging. In the post-rate-cut press conference, ECB President Christine Lagarde mentioned that the bank is not committed to any specific rate path, will remain data-dependent, and that inflation may remain stubborn in the coming months.
In my opinion, the euro will remain weak in the near to medium term, potentially consolidating or continuing to decline until the market price in the data and significant political events occur this week. The EUR/USD pair might start to recover or stabilize in the second half of this month.
