Markets are gradually coming to terms with the ongoing developments in the European political landscape. Investors are more concerned about fiscal dominance in the US. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The euro disregards the widening bond yield spread.
- The US is on the path to fiscal dominance.
- Trump is unlikely to gain a majority in the FOMC before May.
- Long positions on the EURUSD pair can be considered if the price returns above 1.165.
Weekly Fundamental Forecast for Euro
The political crisis in France is an internal matter for France. The eurozone is unlikely to fall into recession. It remains united, as evidenced by the Dutch government winning a vote of no confidence in parliament. François Bayrou may follow the same path. In the worst-case scenario, he will be replaced and everything will settle down. The EURUSD pair rose even against the backdrop of a widening spread in European bond yields. Events in the US are much more important for the major currency pair.
EURUSD Performance and Germany-France Yield Spread
Source: Bloomberg.
The recurrence of last year’s narrative concerning the French political crisis has led to discussions about a potential downturn in the eurozone’s second-largest economy due to uncertainty allegedly weighing on consumer spending. The EURUSD pair fell to three-week lows due to a vote of no confidence in the Dutch government. As soon as it asserted its authority, France was viewed from a different angle.
According to Mizuho Securities, there is a 70% probability that François Bayrou will be replaced by a new prime minister if he loses the vote in parliament. The likelihood of early elections to the National Assembly is estimated at 25%, and only 5% of the public remains in favor of President Emmanuel Macron’s resignation.
Markets anticipate that France will address its challenges in a manner similar to its approach last year. Another issue is fiscal dominance in the US, which could have disastrous consequences for the US dollar. This term refers to the government’s strategy to reduce the budget deficit. The government aims to do so without raising taxes or cutting public spending, but rather by lowering interest rates. This strategy reduces the cost of debt servicing and facilitates the issuance of new debt at a low cost.
US Budget Balance and Fed Funds Rate
Source: Bloomberg.
If the US pursues a course of fiscal dominance, the US dollar will face severe headwinds. If Donald Trump garners a majority in the Federal Open Market Committee, the federal funds rate could potentially decline to zero. It is highly improbable that Jerome Powell will take action before May, when he is scheduled to relinquish his position as chairman. As a result, the EURUSD pair is showing modest growth, albeit at a gradual pace, partly due to the ongoing political crisis in France.
The major currency pair’s rebound was driven by a new record high for the S&P 500 and the associated improvement in global risk appetite. The euro is often considered the currency of optimists, tending to appreciate during periods of global economic stability and strength. However, the problems are always around the corner. This time, they have led to the consolidation of the EURUSD pair.
Weekly EURUSD Trading Plan
As a result, markets are gradually adapting to events in France and are showing greater concern about the US’s move toward fiscal dominance. In such conditions, long positions can be considered on the EURUSD pair when the corrective movement runs out of steam, or the quotes return above 1.165.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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