EUR/USD Analysis Today 18/6: Cautious Stability (Chart)

(MENAFN- Daily Forex)

  • At the beginning of this week's trading, EUR/USD stabilized around $1.07, remaining at its lowest levels in seven weeks.
  • This is after a 0.8% decline last week, which was the biggest loss since April.
  • In general, market participants are monitoring the Political turmoil in France and waiting for any new developments.
  • Legislative elections are scheduled for June 30 and July 7, with Le Pen's National Rally party leading in the polls.

Recently the party has proposed policies such as cutting sales taxes and lowering the retirement age, and political uncertainty has led to bond sales and higher risk premiums in France.

In this regard, European Central Bank officials have stated that they currently have no plans to consider emergency purchases of French bonds. On the monetary policy front, the European Central Bank recently implemented its first interest rate cut in five years, but is taking a cautious approach to further cuts.

According to reliable trading platforms, the EUR/USD exchange rate is expected to remain under pressure in the coming days amid French political uncertainty. The exchange rate fell by 0.88% last week, which led to further technical deterioration. As a result, we expect further weakness in the coming days.

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EUR/USD Technical analysis and forecast:

The next downside target is the 1.0668 support level, which is the 78.6% Fibonacci retracement level of the April-May rally. We saw a strong rejection of the level on Friday, suggesting that support is indeed present here. Technically, the Relative Strength Index (RSI) in the lower panel of the chart is at 38 and pointing down, confirming that near-term momentum is negative. The exchange rate is below its 200-day moving average, which we see as a key signal that the broader setup is now negative. While gains can be expected from time to time, they will eventually give way to a broader downtrend.

Ultimately, a test of the April lows at the 1.06 support level is a likely outcome in the next two to four weeks.

Overall, France will be the focus for the euro this week and any deterioration in sentiment will lead to further weakness.“EUR/USD could continue to fall due to ongoing political issues in France,” said Christina Clifton, a strategist at the Commonwealth Bank.

However, we note that the week has started relatively quietly, meaning that weekend developments have been muted. We wonder whether much of the bad news is already lurking in the euro, increasing the prospects for a recovery.“The market reaction has been logical, contained and there is no sign of panic. Investors are reassessing the risk premium in France, but that is normal,” analysts said. Added, they that the parliamentary majority of the National Rally, the populist right-wing party led by Marine Le Pen, will not be a“confidence barrier” for investors. Markets are therefore expecting President Emmanuel Macron's centrist party to lose the legislative vote, meaning he will have to accommodate a far-left or far-right prime minister. Market fears are that this could further deteriorate France's debt situation, which is already at worrying levels.

The chart shows that the spread between French and German 10-year bond yields has widened as investors sell French bonds in response to concerns about the country's debt trajectory in the face of political uncertainty. Also, the euro-dollar rate is under pressure as the spread rises, underscoring the link between the currency and political concerns.

The European Commission says France's 2024 budget means it risks breaching the bloc's fiscal rules. Clearly, the EU will reinstate debt and deficit rules that were suspended during the pandemic this year. Recently, the commission later asked the French government to take steps to meet EU fiscal rules.

Macron's government has already been struggling to balance the country's fiscal record with voters' demands for more spending. According to forecasts issued in late 2023, the Commission expects debt as a percentage of economic output to rise to 110% of GDP by 2025. Credit rating agency Standard & Poor's downgraded France's credit rating last Friday, pouring cold water on the French government's recent efforts to reorganize its public finances. Political uncertainty in France is likely to continue for at least several weeks, adding some downward pressure on the euro. Furthermore, any gains in the euro against the US dollar EUR/USD are therefore vulnerable to a rapid collapse.

Today, the euro-dollar EUR/USD rate will be affected by the announcement of eurozone inflation figures, along with the German ZEW reading, followed by the announcement of US retail sales figures.

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