This morning’s knee-jerk sell-off in the EUR/USD towards 1.08 on France heading towards a hung parliament could be limited. Markets should be relieved that France averted the worst outcome at Sunday’s runoff elections, i.e., an outright majority for the far-right National Rally Party. According to CNN, the IPSOS estimate projected the left-wing Leftist New Popular Front alliance taking first place with 172 to 192 seats, followed by President Macron’s centrist party in second place with 150 to 170 seats, and a surprise third place for the National Rally Party with 132 to 152 seats. Whichever party forms the coalition government needs 289 out of the 577 seats in parliament. The French Constitution does not allow another snap election for another year until June 2025.
Drawing on a similar experience in Germany, EUR/USD rose from 1.1950 to 1.2370 during the half year it took to swear in a new coalition government led by Chancellor Merkel in March 2018 from the German federal elections in September 2017. The EUR’s rise was fuelled by global trade volume growth, which improved to 4.7% in 2017 from 1.8% in 2016. In April this year, the World Trade Organisation saw world merchandise trade expanding by 2.6% in 2024 after a 1.2% contraction in 2023. Unless France forms a coalition government led by the far left, fears of a sharp increase in public spending lessened after the European Commission opened an excessive deficit procedure over France breaching budget deficit rules.
With the UK and French elections concluded, the focus now shifts to the US Presidential Elections in November. Apart from the immediate mounting pressure on President Joe Biden to withdraw his candidacy due to his age, America’s unsustainable fiscal situation also became a significant worry for the greenback.
Fed Chair Jerome Powell’s semi-annual testimony to the Senate Banking Committee on July 9 could take the DXY Index below 104.75, its 100-day moving average. The futures market is betting that cooling US inflation and jobs data will provide the Fed the confidence to lower interest rates in September. On July 11, consensus expects US CPI inflation to slow a third month to 3.1% YoY in June from 3.3% in May. Last Friday, the US unemployment rate increased again to 4.1% in June after hitting 4% in May, the Fed’s target for 4Q24. The US economy is no longer exceptional after slowing to an annualized 1.4% QoQ saar in 1Q24 from 3.4% in 4Q23. The Atlanta Fed GDPNow model forecasts 2Q24 real GDP growth staying low at 1.5% vs. its earlier 3.1% estimate at the FOMC meeting on June 12.
NZD/USD will likely rise to test 0.62, the significant resistance level it failed to break sustainably above in February, March, and June. NZD/USD rebounded strongly to 0.6145 last week after finding solid support around 0.6070 (100-day moving average). On July 10, we expect the Reserve Bank of New Zealand to keep the official cash rate unchanged at 5.50%. Although CPI inflation fell to 4% YoY in 1Q24 from 4.7% a quarter earlier, it remained above the RBNZ’s 1-3% target range. The OIS market priced in a 96% probability for a rate cut in November, most likely taking its cue from the RBNZ’s forecast for CPI inflation to return within target by the end of 2024.
Quote of the day
“Markets are constantly in a state of uncertainty and flex and money is made by discounting the obvious and betting on the unexpected.”
George Soros
8 July in history
In 1497, Portuguese navigator Vasco da Gama departed on his first voyage and became the first European to reach India by sea.
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