Euro to Dollar Outlook Scenarios: French Election 2024

June 30, 2024 - Written by David Woodsmith

STORY LINK Euro to Dollar Outlook Scenarios: French Election 2024

The Euro to Dollar exchange rate (EUR/USD) touched seven-week lows at 1.0660 during the week before creeping back above 1.07.

The near-term focus will be on the French parliamentary elections with opinion polls suggesting that President Macron’s centrist party is running behind the right-wing National Rally (RN) and left-wing alliance (NPF).

MUFG notes the risk that the Euro to Dollar (EUR/USD) exchange rate could weaken to 1.05 if President Macron suffers heavy losses in the French parliamentary elections.

Danske Bank forecasts EUR/USD at 1.03 in 12 months with Wells Fargo expecting a very slow recovery to 1.11 at the end of 2025.

ING looked at the implications of an RN victory; “The question for the market is whether a Le Pen government looks at the French bond market and starts dropping some of its plans for seemingly unfunded tax cuts - or pushes ahead.”

It added; “Our eurozone team suspects it will be too early for a new government to substantially water down its pre-election pledges and that it may well be a rocky few months into September.

According to MUFG; “Obviously if RN and NPF were to do worse than expected at the expense of Macron’s Ensemble or Les Republicans, we will likely see some spread narrowing on Monday and some modest EUR gains. With the EUR risk premium relatively modest strong RN & NPF performances will likely see EUR/USD close to the 1.0500-level.”

There were no major US economic developments during the week with the evidence still pointing to a slightly softer labour market.

There also no shift in Federal Reserve rhetoric with Governor Bowman, for example, starting that it was still too early to cut inflation rates given on-going inflation concerns.

Markets continued to price in around a 65% chance of rates being cut at the September meeting.

Wells Fargo looks at near-term yield trends and commented; “For now, we continue to see U.S. dollar strength into Q3-2024 as the Fed delays easing until September, while central banks such as the ECB, Bank of Canada and Bank of England cut interest rates earlier than the FOMC.”

The bank still expects a reversal from later in 2024.

According to Wells Fargo; “longer term, we continue to believe the greenback can weaken starting in Q4 of this year, and for dollar depreciation to persist over the course of 2025. In our view, the combination of the Fed cutting interest rates and slower U.S. economic growth should place depreciation pressures on the U.S. dollar for an extended period of time.

The wider global environment will also be important and it added; “As G10 growth converges toward the U.S., and the U.S. exceptionalism theme fades, we believe sentiment toward foreign currencies can ultimately be supported. In addition, an FOMC that is lowering interest rates should also lead to easier global financial conditions.”

US political developments will also be important with this week’s TV debate between President Biden and former President Trump triggering a fresh round of uncertainty and speculation amid a consensus that Biden performed poorly.

ING commented; “Our baseline assumption is that Trump is the most dollar-positive candidate due to protectionism pledges, geopolitical stance and plans for lower taxes, but markets have not had a real chance to trade on the back of US political news as monetary policy dominated.”

There were no major Euro-Zone economic developments during the week, but weaker-than-expected German business confidence data reinforced market reservations over the outlook.

As far as ECB policy is concerned markets expect gradual rate cuts.

According to HSBC; “Our central case remains that we then see 25bp every other meeting until the key deposit rate reaches 2.5% in September 2024, which should put it close to neutral. However, the stickiness of services inflation means the risks are now tilted towards a slower pace of easing.”

Danske Bank still sees scope for Euro losses; “We believe that fundamental factors indicate a lower EUR/USD in the medium term. In the near term, we expect the cross to continue trading within a range, but we slightly favour the downside due to the EUR leg potentially remaining fragile owing to the political risk premium.”

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TAGS: Euro Dollar Forecasts