Euro Dips as Macron Vote, US Jobs Stir Markets

Key Takeaway

• The euro faces near-term underperformance due to Macron's snap parliamentary vote and strong US jobs data, pushing EUR/USD below key support.
• The US dollar strengthens, reaching a one-month high against the euro, with the Bloomberg Dollar Spot Index rising for three consecutive days.
• Market volatility is expected ahead of US inflation data and the Federal Reserve’s policy meeting, which could influence interest rate cut expectations.

Euro Under Pressure

The euro is poised for near-term underperformance following French President Emmanuel Macron's unexpected call for a snap parliamentary vote. This move has introduced additional political uncertainty, particularly after far-right parties made gains in the recent EU elections. The timing of Macron's decision is critical, as it coincides with a period of lower liquidity in FX markets due to various holidays in Asia.

The latest data from the Commodity Futures Trading Commission (CFTC) indicates that leveraged traders had shifted to net long euro positions ahead of last week’s European Central Bank (ECB) interest rate cut. This positioning, combined with strong US jobs data, has nudged the EUR/USD below a key momentum support line, adding to the downside bias for the currency pair.

Mark Cranfield from Bloomberg notes, "The real fireworks are likely once Europe-based traders are plugged in and the France-Germany bond spread is active." This suggests that the full impact of Macron's political maneuvering may not be felt until European markets fully react.

Dollar Strengthens

The US dollar has firmed up, reaching its highest level against the euro in about a month. This strength is partly attributed to the political jitters in Europe and the recent robust US jobs data. The Bloomberg Dollar Spot Index has risen for the third consecutive day, with the Treasury 10-year yield adding a basis point to near 4.45%.

Tommi Utoslahti from Bloomberg reports, "The euro slips to its lowest level against the dollar in about a month following the weekend’s parliamentary elections." This decline in the euro has also led to a slide in French bond futures, while Bund futures remain relatively unchanged. Euro Stoxx 50 futures are about 0.4% softer, whereas S&P futures and Nasdaq contracts have held steady.

Market Volatility Expected

Heightened volatility is anticipated in both the FX and equities markets, driven by the upcoming release of US inflation data and the Federal Reserve’s policy meeting. The Federal Open Market Committee (FOMC) will update its summary of economic projections and dot plot, which will reveal whether its views align with market expectations for interest rate cuts.

Mary Nicola from Bloomberg highlights, "The USD will weaken should the Federal Reserve maintain the status quo on its dot plot or even adjust to two cuts from three." Traders are currently anticipating a single rate cut in December, influenced by the recent US jobs data. The FOMC’s decision will also be swayed by this week’s Consumer Price Index (CPI) data. Two consecutive months of easing prices could leave the greenback in a weaker position.