The EUR/USD pair extended its decline below the key support level of 1.0700, hitting its lowest point in over a month during Friday’s European session. The Euro remains under pressure due to increasing political uncertainty in France ahead of the legislative elections.
Political Climate in France
The Euro has been particularly volatile this week following French President Emmanuel Macron’s call for a snap election after his party faced a significant defeat by Marine Le Pen’s far-right National Rally (RN) in parliamentary elections. Although the RN party fell short of an absolute majority, recent polls suggest a slight possibility that Macron’s centrist alliance could form a coalition government.
Monetary Policy Perspectives
On the monetary front, European Central Bank (ECB) officials are tempering expectations for future rate cuts. Concerns over achieving the 2% inflation target amidst robust wage growth are contributing to this cautious stance. ECB Governing Council member Bostjan Vasle indicated on Thursday that further rate cuts could be possible if the disinflation trend continues, though he warned that strong wage momentum might slow this process.
US Dollar Strength
EUR/USD faces significant selling pressure as the US Dollar strengthens. The US Dollar Index (DXY), which measures the Greenback against six major currencies, reached a fresh monthly high of 105.55. The Dollar’s firmness is driven by recent Federal Reserve (Fed) projections indicating only one rate cut this year, contrary to the three cuts forecasted in March. Additionally, the core Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred inflation measure, was revised upwards to 2.8% from 2.6%.
Federal Reserve Outlook
Fed Chair Jerome Powell acknowledged that the soft Consumer Price Index (CPI) report for May is encouraging and suggested that inflation is moving in the right direction. However, Powell emphasized that the Fed wants to see sustained declines in inflation before committing to rate cuts. Despite this, market participants are anticipating two rate cuts this year due to the soft CPI and Producer Price Index (PPI) reports for May.
The CME FedWatch tool indicates a 65% probability that the Fed will start cutting rates from the September meeting, up from 50.5% a week ago. Thursday’s PPI report showed an unexpected 0.2% monthly contraction in headline producer inflation, while the core PPI was unchanged. Annually, headline and core PPI decelerated to 2.2% and 2.3%, respectively.
Upcoming Economic Data
Investors are focusing on the preliminary Michigan Consumer Sentiment Index, due Friday, which is expected to improve to 72.0 from the previous reading of 69.1. This index measures public sentiment towards personal finances, business conditions, and buying conditions.
Technical Analysis
The EUR/USD pair has declined below the round-level support of 1.0700, weakening further after failing to sustain a Symmetrical Triangle breakout on the daily chart. This suggests a bearish trend, with the pair now re-entering the triangle formation and expected to find support at 1.0636, close to the upward-sloping trend line from the October 3, 2023 low of 1.0448.
The long-term outlook has also turned negative as the price has dropped below the 200-day Exponential Moving Average (EMA), currently around 1.0800. The 14-day Relative Strength Index (RSI) has fallen below 40.00, indicating that momentum could turn bearish if the RSI remains below this level.
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