France is in turmoil, and investors are pulling their money out of the country. However, the economic indicators are not as alarming as they seem. Besides, markets are gradually adapting, and even the slightest good news can trigger buying in EUR/USD. Let’s discuss this topic and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- Moody’s decided not to downgrade France’s credit rating.
- A sharp decline in business activity failed to push EUR/USD lower.
- Investors are closing positions ahead of the Fed meeting.
- A breakout of the 1.118–1.126 range remains a trading opportunity for EUR/USD.
Weekly Fundamental Forecast for Euro
Everything is relative. Investors are panicking over France, but is the situation really that bad? Yes, French bond yields have climbed to their highest levels since 2002, but they are still lower than those in the UK. Yes, the country’s budget deficit exceeds 5% of GDP, violating EU requirements, but it remains smaller than that of the US. Yes, France’s public debt exceeds the size of its economy and the eurozone average, but it is still lower than Italy’s. If public debt were enough to spark a crisis, Tokyo would face greater risks than Paris. Perhaps speculators have gone too far in selling EUR/USD?
Euro Speculative Positions
Source: Bloomberg.
Hedge funds have increased their net short positions in the euro to the highest levels since March 2020, fearing that France has reached its so-called fiscal limit. At this point, additional taxes hurt rather than help government revenues. At the same time, the country is approaching its political limit, where voters will accept neither tax increases nor spending cuts. Add deep divisions between the leading political parties, the ECB’s reluctance to rescue the bond market, and mass protests, and it becomes clear why investors are fleeing Paris.
However, people can get used to almost anything. Since markets are driven by human emotions, they adapt too. Tensions in France have persisted for some time, and under such conditions, even slightly positive news can prompt investors to take profits on short EUR/USD positions, pushing the major currency pair higher. That is exactly what happened when Moody’s decided not to downgrade France’s credit rating.
European Business Activity
Source: Bloomberg.
As a result, neither the slowdown in European business activity nor the second-fastest weekly widening of the spread between French and German bond yields on record proved fatal for EUR/USD. Instead, buying interest helped the euro stay afloat despite selling pressure. One way investors hedge against the crisis in Paris is by buying US Treasuries. This pushes Treasury yields lower, makes US assets less attractive, and weighs on the dollar.
Investors are closing EUR/USD positions for reasons beyond the situation in France. Markets genuinely do not know what to expect from the Fed. Accelerating inflation suggests that the federal funds rate could rise by as much as 50 basis points in December following a pause in October. Bloomberg, however, expects borrowing costs to remain unchanged through year-end, as a plunge in the S&P 500 would tighten financial conditions. In effect, markets will do the central bank’s job for it.
Weekly Trading Plan for EUR/USD
Thus, EUR/USD may remain in consolidation until the Fed’s October policy decision and the subsequent press conference by Kevin Warsh. A breakout of the 1.118–1.126 trading range remains a relevant strategy.
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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