Markets believe that the European Central Bank has put an end to its cycle of monetary expansion. However, the political crisis in France, along with other geopolitical factors, may force the EU regulator to change its mind. Let's discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The dollar is rising despite the Fed's monetary policy.
- The euro is scared by new sanctions against Russia's partners.
- The ECB may give a dovish signal.
- Long positions can be opened if the EURUSD pair breaks through 1.1725.
Daily Fundamental Forecast for Euro
If the market does not align with investors' expectations, it is more likely to deviate from that path. The decline in the US producer price index, the increased likelihood of three rate cuts by the Fed in 2025, and the new record high of the S&P 500 and the associated improvement in risk appetite did not help the EURUSD pair return to the levels seen after the release of US employment statistics for August. What factors have led to this development?
US Producer Price Index Inflation
Source: Wall Street Journal.
Indeed, one could point to Donald Trump's failure to remove Lisa Cook from the September vote on interest rates. They say that the Fed's independence has been preserved, and with it, confidence in the US dollar has returned. However, the extra person on the side of the US administration will not make much of a difference at the next FOMC meeting. The cycle of monetary expansion will likely resume.
As a rule, when the US dollar strengthens, it does so against all major world currencies. This time, only the Europeans currencies are under pressure. The Asian currencies, on the contrary, are growing, led by the yuan and its proxies – the Australian and New Zealand dollar. The eye of the storm is in Europe.
France is facing early parliamentary elections, as the main parties have not accepted the new prime minister. Yields on local bonds have exceeded Italian counterparts for the first time in history, pointing to heightened political risk.
Spread Between Italian and French Bond Yields
Source: Bloomberg.
At the same time, geopolitical tensions are rising. Donald Trump is losing patience and is ready to use secondary sanctions against Russia, punishing China and India for supporting the armed conflict in Ukraine. The Russian ruble is falling, and with it, hopes for a quick peace in Europe are melting away, which is negatively affecting European currencies.
Meanwhile, the potential for oil price surges is escalating, a development that is particularly unfavorable for the eurozone given its status as a net importer of energy commodities. This is particularly salient in light of the escalating tensions in the Middle East, triggered by Israel's recent strikes on Qatar.
Investors expect the ECB to have completed its cycle of monetary expansion, but nothing stays good forever. In the 21st century, the next black swan event may happen at any moment. There are risks that the political crisis in France or geopolitical turmoil will force the ECB to deliver dovish signals at its September meeting. This decision will likely hurt the EURUSD pair, as would a possible acceleration in consumer prices in the US.
Daily EURUSD Trading Plan
When monetary policy clashes with geopolitics, currency pairs on Forex move chaotically. It makes sense to bet on CPI data. A slowdown in CPIs and a breakout of resistance at 1.1725 will give a buy signal for the EURUSD pair. However, accelerating inflation will increase the risk of the euro returning to 1.165. The same applies to dovish signals from the ECB.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
