EUR/USD surges on France’s first-round elections outcome and firms Fed rate cut prospects

EUR/USD rises to near 1.0770 as the first round of France’s legislative elections showed the far-right dominance, but by a small margin.
The US Dollar declines as the expected fall in the US core PCE boosts Fed rate cut bets.
Investors await the preliminary German HICP and US ISM Manufacturing PMI for June.

EUR/USD gains 0.50% and jumps to more than a two-week high near 1.0770 in Monday’s European session. The major currency pair strengthens as exit polls of the first round of France’s parliamentary elections on Sunday showed that Marine Le Pen’s far-right National Rally (RN) is in a comfortable position but with a smaller margin than projected and a significant correction in the US Dollar (USD).

The uncertainty over RN gaining an absolute majority has significantly improved the Euro’s appeal. “We might actually get less fears of more expansionary and unsustainable fiscal policy if the far-right party did a little bit worse,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

Now, investors will turn to the second-round runoffs, scheduled for July 7.

On the monetary policy front, investors look for cues about whether the European Central Bank (ECB) will deliver subsequent rate cuts. The ECB started reducing interest rates in early June after maintaining a restrictive interest rate stance for two years to tame price pressures prompted by pandemic-led stimulus.

In Monday’s session, the major trigger for the Euro will be the preliminary German Harmonized Index of Consumer Prices (HICP) data for June, which will be published at 12:00 GMT. Economists expect annual HICP in the Eurozone’s largest economy to rise at a slower pace of 2.6% from the prior release of 2.8%. The monthly Consumer Price Index (CPI) is expected to rise at a higher pace of 0.2% from 0.1% in May. 

The scenario in which German inflation declines expectedly or at a faster pace will boost expectations of early rate cuts by the ECB, while hot numbers will ease the ECB’s subsequent rate cut hopes. 

This week, the major trigger for the Euro will be the preliminary Eurozone’s HICP data for June, which will be published on Tuesday.

Daily digest market movers: EUR/USD jumps to two-week high while US Dollar slumps

EUR/USD surges to 1.0770 as the US Dollar corrects after the expected decline in the United States (US) core Personal Consumption Expenditures Price Index (PCE) data for May cemented expectations of early rate cuts by the Federal Reserve (Fed). The US PCE report showed on Friday that the core PCE inflation data, the Fed’s preferred inflation measure, decelerated expectedly to 2.6% from the prior release of 2.8%. 
According to the CME FedWatch tool, 30-day Federal Fund futures pricing data shows that the probability for rate cuts in September is 63.4%. The data also suggest the Fed is expected to deliver two rate cuts this year against one projected by policymakers in their latest dot plot.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines to near 105.40.
This week, the US Dollar is expected to remain highly volatile as various economic data are lined up for release. In Monday’s session, investors will keenly focus on the ISM Manufacturing Purchasing Managers’ Index (PMI) report for June, which will be published at 14:00 GMT.
Economists expect factory activity to improve to 49.0 in June from the prior reading of 48.7 but remain contracted, as a figure below the 50.0 threshold separates expansion from contraction. However, the preliminary S&P Global PMI report released on June 21 showed that the US Manufacturing PMI rose to a three-month high at 51.7 from May’s reading of 51.3
In the PMI report, investors will also focus on other sub-components, such as the New Orders Index and Price Paid, which indicate the factory outlook and change in input prices of the manufacturing sector, respectively,  and will provide cues about inflation expectations.

Technical Analysis: EUR/USD remains inside Symmetrical Triangle

EUR/USD rebounds after discovering strong buying interest near the upward-sloping border of the Symmetrical Triangle formation on a daily timeframe near 1.0666, which is marked from 3 October 2023 low at 1.0448. The downward-sloping border of the above-mentioned chart pattern is plotted from 18 July 2023 high at 1.1276. The Symmetrical Triangle formation exhibits a sharp volatility contraction, which indicates low volume and narrow ticks.

The major currency pair remains below the 200-day Exponential Moving Average (EMA) near 1.0790, suggesting that the overall trend is bearish.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.

Economic Indicator

Consumer Price Index ex Food & Energy (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is seen as bearish.

Read more.

The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

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