EUR/USD weakens to near 1.1700 on fears of French political crisis
- EUR/USD drifts lower to near 1.1705 in Tuesday’s Asian session.
- French PM resigned just hours after naming a new cabinet on Sunday, sparking fresh political chaos in France.
- The Fed is expected to deliver rate cuts in October and December.
The EUR/USD pair loses ground around 1.1705 during the Asian trading hours on Tuesday. The Euro (EUR) softens against the US Dollar (USD) after France's new Prime Minister Sebastien Lecornu and his government resigned on Monday, hours after announcing his cabinet line-up. The German August Factory Orders and French Trade Balance data are due later on Tuesday.
Sebastien Lecornu has resigned just weeks after his appointment, making it the shortest-lived administration in modern French history. This raises fear of a fresh political crisis in France and exerts some selling pressure on the Euro. Fitch downgraded France's ratings last month, and Moody's is widely anticipated to follow suit before the end of October.
Across the pond, the ongoing US government shutdown could raise concerns over the impact on the US economy, which might drag the Greenback lower and act as a tailwind for the major pair. The shutdown is leaving a void of US economic data, with last Friday's closely watched Nonfarm Payrolls (NFP) report for September delayed along with other key releases until the government reopens.
The Federal Reserve (Fed) is widely expected to cut rates by 25 basis points (bps) at its October meeting amid signs of a weakening labor market. Financial markets are now pricing in nearly an 83% chance of an additional Fed rate cut in December, according to the CME FedWatch Tool, though this will likely depend on data released before then.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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