Donald Trump has repeatedly called on the Fed to lower interest rates. His example appears to have caught on among French politicians, who are now calling for the ECB to ease monetary policy. Let’s examine the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- France is calling on the ECB to cut interest rates.
- Capital outflows from Europe are pressuring the euro.
- The Fed intends to raise interest rates in December.
- As long as the EUR/USD pair remains below 1.121, selling remains a viable strategy.
Weekly Fundamental Forecast for Dollar
Calls by French party leaders for the ECB and the country's central bank to cut interest rates may appear to an unsophisticated electorate as evidence of political shrewdness. In reality, however, they are misguided and are weighing on the EUR/USD pair. Earlier this year, the US dollar repeatedly stumbled when Donald Trump threatened Jerome Powell. Something similar now appears to be happening to the euro.
Central banks do not exist to solve governments' fiscal problems. Yet sometimes the challenges facing the executive branch become so intractable that it must call on policymakers to lower interest rates. Donald Trump did this repeatedly. In October, it was Marine Le Pen's turn. As the front-runner in the French presidential race, her proposed measures to reduce the budget deficit and lower debt-servicing costs appear so radical that they are unnerving investors.
France's Budget Balance as Share of GDP
Source: Bloomberg.
The main rival of National Rally leader Jean-Luc Mélenchon has pledged to subject Bank of France Governor Emmanuel Moulin to political pressure if elected president.
Of course, French politicians have far fewer levers of influence over the ECB than the US administration has over the Fed. However, they have another potential source of leverage: the possibility of a country leaving the eurozone. Such a scenario would pose a far greater threat to the euro than concerns over the Fed’s independence pose to the US dollar.
As a result, investors are moving capital out of France—and not just from the bond market. The significant divergence in stock-market performance points to potential capital outflows and is one of the factors weighing on the EUR/USD pair.
Stock Indices in US and France
Source: Wall Street Journal.
According to Rabobank, as long as the US growth remains intact and expectations for the Fed's policy rate continue to rise, the dollar should continue to attract buyers. Against this backdrop, even the minutes of the September FOMC meeting failed to stop EUR/USD bears. Most officials agreed that a federal funds rate hike would likely be appropriate by year-end. The odds of a hike in October remained virtually unchanged, while the probability of a December move edged higher.
The US dollar continues to benefit from American exceptionalism and the Fed's faster pace of monetary tightening relative to other major central banks. Meanwhile, the euro is facing pressure from capital outflows linked to France's fiscal difficulties, as well as attempts by politicians to pressure the ECB—developments that are undermining confidence in the single currency.
Weekly Trading Plan for EUR/USD
There is no doubt that every trend faces corrections. However, if the EUR/USD pair fails to return above 1.1210, it could present an opportunity to add to existing short positions.
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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