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French Election Aftermath and Euro Stability
Following the recent French elections, political uncertainty remains high, yet the euro has shown remarkable stability during the Asian trading session/open on yesterday. EUR/USD has fluctuated narrowly between 1.0801 and 1.08448, reflecting a muted market response.
EURUSD H1
The second round of elections revealed that the Republican Front successfully curbed the rise of the far-right. Despite predictions, Marine Le Pen's RN party secured only 143 seats, making it the third-largest party, contrary to earlier expectations of a major win. Instead, the left-leaning New Popular Front emerged as the largest party with 182 seats, followed by President Macron’s centrist alliance with 168 seats. All parties fell short of the 289 seats needed for an absolute majority, resulting in a hung parliament.
Prime Minister Gabriel Attal has announced his resignation, initiating the formation of a new government. President Macron now faces two primary options: forming a "centre-left" coalition excluding the far-left or appointing a technocratic administration. Socialist leader Olivier Faure emphasizes collaboration to address public demands, while Jean-Luc Mélenchon of France Unbowed insists on implementing his party’s full program, rejecting any coalition with Macron. This fragmented political landscape likely means challenges ahead in passing legislation, potentially affecting France’s economic stability and the euro.
The uncertainty in forming a stable government is expected to have a modestly negative effect on France’s economy and the euro. However, the outcome is still preferable to a majority win by the far-right or far-left, whose policies might have caused more disruption. Analysts predict the euro will remain within a stable range of 1.0500 to 1.1000 against the US dollar in the near term.
US Markets Employment Data and Federal Reserve Expectations
The US dollar has weakened slightly after the release of softer-than-expected nonfarm payrolls (NFP) data. The dollar index dropped below 105.00 following the report, which reinforced expectations for multiple rate cuts by the Federal Reserve. The NFP report showed employment growth slowing to 206,000 in July, with significant downward revisions for previous months.
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The public sector showed strong job gains, while the private sector lagged, adding only 136,000 jobs in June. This is below the average private sector job growth seen earlier this year. The unemployment rate also edged up to 4.1%, with the Sahm rule suggesting further increases in the coming months. This balanced labour market helps mitigate inflation risks, providing some reassurance to the Fed.
Key upcoming events include Fed Chair Powell’s semi-annual testimony on monetary policy and the release of the latest CPI report for June. Powell is expected to hint at possible rate cuts starting in September if inflation continues to decline. A softer core CPI print would likely support this outlook, keeping the US dollar on a weaker trajectory unless unexpected inflation spikes occur.
USA CPI
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