What is more important, French politics or the slowdown of the US economy? After Emmanuel Macron announced unscheduled parliamentary elections, Forex began speculating about parity in the EUR/USD pair. They say the right-wing party will lead the country to Frexit, which would be a disaster for the euro. Investor attention shifted to US statistics, allowing the main currency pair to find its bottom.
According to recent polls, the National Rally will garner 36% of the electorate's votes, the New People's Front will be second with 29%, and Macron's Renaissance party will receive 19%. There needs to be more for Marine Le Pen and her supporters to form a majority. Moreover, the right-wing parties do not intend to violate EU rules, which calmed financial markets. The yield differential between French and German bonds decreased, and talks of parity in the EUR/USD pair disappeared.
Projected seat distribution in the French Parliament
On the contrary, there is no talk of halting the slowdown in the US economy. A 0.6% decrease in core capital goods orders, the fastest pace in 2024, indicates a decline in investments. The rise in repeat unemployment benefit claims to the highest level since 2021 signals a cooling labor market.
According to research from the Federal Reserve Bank of San Francisco, Americans' excess savings have been completely depleted, heightening concerns about the sustainability of strong consumer spending. This safety net is nearly inaccessible. Therefore, household purchasing power is linked to current incomes, which depend on the labor market's condition. A rapid cooling of the latter poses serious GDP challenges.
Dynamics of US durable goods orders
Thus, while the market has largely calmed down regarding political risks in France, no one has dismissed the slowdown in the US economy. This puts pressure on the US dollar and suggests that EUR/USD has found its bottom.
As for the Federal Reserve, which continues to stubbornly ignore signs of economic cooling in the US and insists on maintaining the federal funds rate plateau at 5.5%, what should we make of it? Officials have their reasons for this. They are concerned about easing financial conditions, which could lead to high inflation. Nevertheless, the depletion of fiscal stimuli and the slowdown in the US labor market will force the Fed to acknowledge the obvious.
The futures market continues to show a 65% probability of initiating a monetary easing cycle in September, and based on the latest statistics, I see no reason to question the derivatives.
Technically, on the daily chart of EUR/USD, a Triple Bottom pattern is currently forming. If the market does not go where it is expected to go, it is more likely to move in the opposite direction. The euro may have reached its bottom. Is it time to buy it with targets at $1.08 and $1.0835?
