EUR/USD Forecast: Euro Under Pressure as French Election Looms

The euro was under pressure in the first half of Wednesday’s session, ahead of the French snap election and due to growing signs of weakness in Germany’s economy. This political uncertainty has bolstered the US dollar, especially against currencies where the central bank is more dovish or where interest rates are significantly lower than the US – for example the Japanese yen. In fact, we have just seen a fresh multi-decade high for the USD/JPY pair today after it broke above the high of 160.21 made in April. But as far as the EUR/USD forecast is concerned, well for now it remains bearish. With the EUR/USD falling below the 1.07 mark today, and the German DAX giving up its earlier gains, these moves underscore concerns shared among equity and FX investors alike.

More Signs of Weakness in the German Economy

Recent data from Germany suggests that the economic recovery from last year’s downturn is slowing, which might prompt the ECB to cut interest rates again. The GFK consumer confidence index fell unexpectedly to -21.6 in June, down from a revised -21 in May, contrary to expectations of a slight improvement to -18.9. This drop follows weaker-than-expected results from the German business climate index and disappointing PMI data from the end of last week.

Although the ECB cut rates by 25 basis points in June, it hesitated to commit to further rate cuts due to concerns about a strong labour market and high wage growth. However, a weakening German economy and signs of a stagnating recovery could compel the ECB to act again in the coming months.

EUR/USD Forecast: Upcoming Macro Events

A significant risk event is the French parliamentary election, with the first round occurring this Sunday, June 30. The full extent of Marine Le Pen's party's progress will likely be known after the run-offs on July 7. This political uncertainty is expected to keep the EUR/USD under pressure or at least limit its upside potential, thereby supporting the dollar index. Current polls indicate that Marine Le Pen’s far-right RN party is leading.

In the US, key data releases to watch include the May core PCE inflation figures this Friday, the June non-farm jobs report on July 5, and the CPI report on July 11.

US Dollar Support Amid Political Uncertainty

Recently, the US dollar has been favoured as a hedge against political uncertainty in Europe, especially as traditional safe-haven currencies like the Swiss franc and Japanese yen have become less attractive due to looser monetary policies in Switzerland and Japan. The SNB’s recent rate cut has strengthened the US dollar against the euro, with investors preferring the higher yielding USD over CHF. Consequently, the near-term direction and the EUR/USD forecast remains uncertain amidst political instability in France and the rise of far-right parties across Europe.

Key US Data to Watch

This week, the crucial US data release is the Core PCE index on Friday. Before that, new home sales data will be released today, followed by pending home sales, jobless claims, durable goods orders, and the final Q1 GDP estimate on Thursday. Last Friday, stronger-than-expected PMI data and better existing home sales further supported the dollar. The EUR/USD remains under pressure, and the euro is likely to continue lagging in any USD-negative scenarios this week, especially ahead of the French elections.

Looking beyond near-term election uncertainty in Europe, the US dollar might initiate a more substantial move if the market gains confidence that the Fed will begin an easing cycle. This makes the upcoming PCE data particularly critical, followed by the June non-farm jobs report on July 5 and the CPI report on July 11.

EUR/USD Forecast: Technical Analysis and Levels to Watch

Source: TradingView.com

The EUR/USD has been consolidating between short-term levels without a clear direction. The pair has fallen below key moving averages like the 200-day MA and broken support levels at 1.0790 and 1.0750, which are bearish signs. Support at the top of the 1.0650 to 1.0680 range was being tested as of this writing. Here, we also have a bullish trend line coming into play. Thus, if this support area also breaks, then the next target could be the April low near the 1.06 mark. The technical EUR/USD forecast will only improve with a higher high or a key reversal pattern on the chart, but no such signals have been observed so far.

Conclusion

In summary, the EUR/USD forecast remains bearish amidst political uncertainty in France and economic weakness in Germany. Key macro events and US data releases in the coming days will be crucial in determining the dollar’s direction. 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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