Rumors about the resignation of the French president provoked a new wave of sales of European assets and led to the resumption of the downward movement of EUR/USD. And let Emmanuel Macron refute them, referring to the fact that there are laws, and not the desire for a National rally. However, it was already impossible to stop the "bears." They took advantage of the fact that the yield differential between French and German bonds, a key indicator of political risk in the eurozone, has reached unprecedented heights since March 2020.
Dynamics of the yield differential of French and German bonds
Opinion polls show that Marine Le Pen's party may become the largest in the National Assembly for the first time in history. 34% of respondents prefer her, compared with 19% who are ready to vote for Emmanuel Macron's Renaissance party. If the Eurosceptics form a government, expect trouble. Yes, their demands are far from what was proposed in 2012 and 2017, but there will certainly be contradictions with the European Union. And no one needs these risks. Unsurprisingly, EUR/USD is selling out.
If Emmanuel Macron's calls for European unity and reforms worked in the past, now the French are concerned about high inflation, refugee flows from Eastern Europe, and the security problems associated with them.
The results of the French parties in the elections
The euro needs to be helped by the reluctance of most ECB officials to lower the deposit rate in July. According to Christine Lagarde, the fight against inflation is still ongoing. The chief "dovish" of the Governing Council, Francois Villeroy de Galhau, believes that the ECB should not take its time and postpone decisions on easing monetary policy. There is no place for haste or procrastination. Everything will depend on the data.
Against the background of the political drama that has played out in France, another factor of pressure on EUR/USD is the report on American inflation for May. If there is an acceleration in consumer prices, FOMC officials will show only one reduction in the federal funds rate in their updated forecasts. On the contrary, a slowdown in CPI is the way to two acts of monetary expansion by the Fed in 2024, the first of which is likely to take place in September. In the first case, investors will turn to the US dollar. In the second, they will start selling it, which will help the "bulls" on the main currency pair.
If fears spread to the American stock market, the correction of the S&P 500 will pull down EUR/USD. In this scenario, the euro risks falling below $1.07 even before the statistics on consumer prices in the United States for May are released.
Technically, the southern hike continues on the EUR/USD daily chart. We keep the focus on selling and building up short positions previously formed from the levels of 1.085 and 1.079. The targets are still 1.06 and 1.05. Why give up something that works?
