Euro Stocks Wobble, Traders Eye French Vote, ECB Moves

Key Takeaway

• Euro Stoxx 50 futures underperform US contracts amid French parliamentary election uncertainty, impacting CAC 40 futures and EUR/GBP.
• Macron's snap vote call adds political risk, weakening the euro; leveraged traders shift to net long euro positions ahead of ECB rate cut.
• US inflation data and FOMC meeting drive market volatility; potential Fed rate cuts could weaken USD if CPI shows easing prices.

European Stocks Under Pressure

Euro Stoxx 50 futures are underperforming US contracts on Monday, with further downside expected once French contracts open. Equity traders have been preparing strategies for the upcoming US CPI data and the Federal Open Market Committee (FOMC) meeting, but the surprise announcement of French parliamentary elections has added an unexpected twist. CAC 40 futures, which open one hour before French cash markets, could see investors front-running a negative stocks session. The weakness in EUR/GBP is likely to extend, fueling broad negativity toward European assets.

European stocks have enjoyed a positive year so far, but the results of the snap French vote, which will straddle the end of the second quarter, are causing traders to adopt a defensive stance. CAC 40 futures have lost upward momentum around the 8,200 zone, adding to the cautious sentiment.

Euro Faces Political Risk

The euro is set for near-term underperformance following French President Emmanuel Macron's surprise call for a snap parliamentary vote. This move adds additional uncertainty, especially after far-right parties made gains in the recent EU elections. The euro's softness is expected to act as a safety valve, particularly in the early part of the week when FX markets are less liquid due to various holidays in Asia.

The latest CFTC data shows that leveraged traders shifted to net long euro positions ahead of last week’s ECB interest rate cut. However, strong US jobs data has nudged EUR/USD below a momentum support line, adding to the downside bias for the currency pair. "Macron’s gambit adds additional uncertainty," noted Mark Cranfield from Bloomberg, highlighting the increased political risk in Europe.

US and Global Market Dynamics

The dollar and equities are set for heightened volatility driven by the release of US inflation data and the Federal Reserve’s policy meeting. The 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. The USD is expected to weaken if the Federal Reserve maintains the status quo on its dot plot or adjusts to two cuts from three. Recent US jobs data has led traders to anticipate a single rate cut in December. The FOMC’s decision will also be influenced by this week’s CPI data; two consecutive months of easing prices could leave the greenback in a weaker state.

In addition to the euro facing pressure from Macron's political maneuvers, the Japanese yen and Chinese equities are also under scrutiny. JGBs are expected to decline as the Bank of Japan sets the stage to reduce JGB purchases, with Bloomberg Economics anticipating a July hike. The yen remains weak, and without aggressive action from the BOJ, it is unlikely to gain significant traction. Meanwhile, China's equities are seeking new catalysts as the initial optimism from recent policy announcements wanes. Sustained support from policymakers is crucial, especially if economic indicators such as monetary and CPI data continue to reflect sluggish growth.