Christine Lagarde's verbal interventions, Donald Trump's statement that he would not attack Iran before the primaries, and the subsequent decline in bond yields helped the EUR/USD pair regain some ground. Let's examine these developments and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- The ECB has the tools needed to address the crisis.
- France does not need a miracle to overcome its challenges.
- The US has pledged not to attack Iran before the election.
- Short positions can be opened on pullbacks from 1.1280, 1.1340, and 1.1400.
Weekly Fundamental Forecast for Euro
The debt crisis has made Europe increasingly resemble Japan. In both cases, authorities have initially relied on verbal interventions to prepare markets for the possibility of direct intervention. Christine Lagarde’s statement that the ECB has the tools to counter unjustified and disorderly market movements echoes remarks by Japanese Finance Minister Satsuki Katayama. When such rhetoric is heard for the first time, it can help stabilize the EUR/USD pair by reassuring investors that policymakers are prepared to act.
Euro Area Bond Yields
Source: Bloomberg.
France has one of the highest debt burdens in the eurozone, and the recent surge in its bond yields to their highest levels since 2020 is putting additional pressure on public finances and raising concerns within the government. Investors are also growing increasingly uneasy as default risks remain an acute headache. These fears are amplified by proposals from presidential candidate Jean-Luc Mélenchon, who has suggested that the central bank write off the debt it holds. This amounts to €544 billion out of France's total public debt of €2.9 trillion.
The ECB does have the Transmission Protection Instrument (TPI), which allows it to purchase eurozone government bonds to counter unwarranted market pressures. However, activation is conditional on compliance with EU fiscal and economic policy requirements, which could limit its use in France's current circumstances. Moreover, large-scale monetary expansion could fuel inflationary pressures that are already elevated. For now, Frankfurt appears to be relying on verbal interventions, while Paris insists that it does not need a "hand of God" to resolve its problems.
Christine Lagarde's efforts to calm the markets are not the only factor helping EUR/USD regain its footing. Donald Trump's statement that the US does not intend to attack Iran before the midterm elections has also tempered Brent bulls. Previously, reports that Washington was considering military action, combined with attacks on tankers in the Strait of Hormuz and airports in Saudi Arabia, had driven Brent prices to $106 per barrel.
Christopher Waller's remarks have also weighed on the US dollar. The FOMC member argued that the Fed should raise interest rates but does not need to do so at every meeting. Following his comments, the implied probability of a rate hike in October fell to 17%. This shift in expectations, together with the pullback in Brent crude prices and US Treasury yields, has helped the EUR/USD pair recover.
The euro certainly needs a breather after such a sharp decline. However, several headwinds remain. European natural gas prices have risen 147% since the start of the conflict in the Middle East, gas storage facilities are only 72% full—below the five-year average—and France's political and fiscal crisis may not yet have peaked. Against this backdrop, the current consolidation in the EUR/USD could prove short-lived.
Weekly Trading Plan for EUR/USD
As a result, a false breakout above the upper boundary of the 1.1160–1.1280 trading range could offer an opportunity to sell the EUR/USD pair. The same strategy could apply if the pair fails to break through resistance levels of 1.1340 or 1.1400.
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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