EUR/USD forecast in sharp focus as French election nears

The EUR/USD rose along with equity indices in Europe in the first half of Monday’s session. It remains to be seen if the gains can be maintained, however, amid ongoing political uncertainty in France and across Europe. The greenback was also weaker against a number of other major currencies, driven lower by profit-taking. In recent weeks, the US dollar has become the preferred hedge against political uncertainty in Europe. This has been especially the case given that both the Swiss franc and Japanese yen, traditional safe haven currencies, have fallen out of favour because of looser monetary policies in Switzerland and especially Japan. Last week, the SNB surprised the market with a rate cut and this has effectively strengthened the US dollar against the euro. In short, the EUR/USD forecast is far from certain amid political uncertainty in France and the rise of far-right parties across Europe.

What are the next big macro events for EUR/USD?

One big risk event is taking place next Sunday, on June 30. This will mark the first round of the French parliamentary election. But it is likely that the extent of Marine Le Pen party's progress will only be known after the run-offs on July 7. This, i.e., the political uncertainty, should keep the EUR/USD under pressure or at least limit the upside potential, keeping the dollar index supported. The single currency has started this week brightly, even if the latest polls continue to show Marine Le Pen’s far-right RN party remaining in the lead. Meanwhile, in the US, we will have a few important data releases too, starting with the May core PCE inflation figures this Friday, followed by the June non-farm jobs report next Friday, July 5, and the month’s CPI report on July 11.

EUR/USD forecast: US dollar likely to remain supported for now

This week’s jet US data releases include US CB Consumer Confidence (Tuesday) and US Core PCE index (Friday).

On Friday, we saw the release of stronger-than-expected PMI data from the US, while existing home sales also beat. This further aided the dollar rally, causing the USD/JPY to close in on its multi-decade high of 160.21 hit in April. The EUR/USD closed below the 1.07 handle, but it couldn’t hold there today, even if the German ifo Business Climate disappointed expectations.

There’s not much on the US economic calendar today, but a key gauge of consumer confidence is up next on Tuesday. Consumer sentiment showed an unexpected rise last month, according to a survey of about 3,000 households by the Conference Board. However, the more current measure, the UoM Consumer Sentiment barometer, disappointed last week. This suggests that the optimism in the tech sector is not reflected among the broader US population outside the stock market. Another drop in consumer sentiment could boost haven assets like gold and weaken the USD, especially in light of the recently released weaker retail sales data and rising jobless claims numbers.

Still, the euro is likely to remain a laggard in any USD-negative scenarios this week ahead of the French elections. Investors expecting a weaker US dollar should focus on another currency pair.

Looking beyond the near-term election uncertainty in Europe, the US dollar could initiate a more substantial move once the market become confident enough that the Fed will start an easing cycle. This puts the upcoming PCE data into sharp focus, which will be followed next week by the June non-farm jobs report, on July 5, and the month’s CPI report on July 11.

The timing of the first Fed rate cut has been highly volatile this year. Initially expected in June, stronger data releases pushed expectations to December. Recently, a few disappointing data points have shifted expectations to September. The Core PCE data, the Fed’s preferred measure of inflation, is crucial this week. Following weaker CPI and PPI reports, another weaker-than-expected inflation report could cause the dollar to start heading lower again.

EUR/USD technical analysis

Source: TradingView.com

The EUR/USD is bouncing around between short-term levels, without making any progress in any direction. The pair has moved below the key moving averages like the 200-day MA and broken a few support levels like 1.0790 and 1.0750 recently, which is not a strong sign by any means. So, the technical EUR/USD forecast, and the overall trend is bearish until the charts tell us otherwise. Support at 1.0680-1.07.00 needs to hold to prevent a breakdown towards the April low near 1.06 handle.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R