A Report by CYS Global Remit Counterparty Sales & Alliance Unit
Euro Rebounds Against the Dollar Amidst Political Turmoil
The U.S. Dollar weakened against the Euro on Monday as the Euro bounced back after hitting a low. The Euro went up by 0.25%, reaching $1.07305. Just last week, it had dropped to a six-week low of $1.066775 after France announced a snap election.
What’s Happening in Europe?
France is experiencing political turmoil. President Emmanuel Macron called for a snap election after his party faced a major defeat by Marine Le Pen’s Eurosceptic National Rally party in the European Parliament elections. This has raised concerns about a possible budget crisis in the Euro area due to rising support for far right and leftist parties, putting more pressure on Macron’s government.
Marine Le Pen attempted to calm fears by stating that she does not want Macron to resign and respects the institutions. Despite this, the French financial markets saw a significant sell-off late last week. However, the European Central Bank (ECB) has no plans yet to discuss emergency measures, according to Reuters.
The Euro’s Recovery
The recent stabilization of French markets has helped the Euro recover. Helen Given, an FX trader at Monex USA, noted that as French markets began to stabilize, the Euro showed signs of recovery.
Ongoing Political and Financial Challenges
The political instability in Europe, especially in France, adds complexity to the economic outlook. The rise of Eurosceptic and far-left parties could disrupt the region’s financial stability. Macron’s call for a snap election might consolidate his power but also introduces significant market uncertainty.
Currently, ECB policymakers are not considering emergency interventions, suggesting they believe the market can stabilize on its own. The Euro’s slight recovery shows cautious optimism among investors.
ECB’s Expected Rate Cuts
Economists predict that the ECB will cut its deposit rate twice more this year, in September and December. This forecast remains unchanged despite recent improvements in business activity, strong wage data, and ongoing price pressures.
ECB Chief Economist Phillip Lane mentioned no "acute urgency" to lower interest rates if economic growth continues. ECB President Christine Lagarde emphasized that policy decisions would be based on economic data. Greg Fuzesi, an economist at JPMorgan, expects further rate cuts but acknowledges that recent GDP growth might prompt the ECB to wait for more data before making another cut in September.
Financial markets, initially anticipating one more cut this year, now expect two cuts, partly due to the political turmoil following Macron’s call for elections. Inflation in the Eurozone rose to 2.6% last month and is not expected to meet the ECB’s 2% target until the second quarter of 2025.
Resilience of the Euro
Despite the political unrest in Europe, particularly in France, the Euro has shown resilience by rebounding against the dollar. The ECB is expected to proceed with two more rate cuts this year, in September and December, driven by a data-focused approach to maintain economic stability in the Eurozone. Financial markets have adjusted to these anticipated cuts, showing confidence in the ECB’s commitment to keeping the economy stable.
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