The EUR/USD currency pair remains under pressure, despite recent minor rebounds. While some market participants initially reacted to easing tariff concerns, the fundamental outlook for the Euro against the US Dollar remains bearish. This analysis delves into the key factors driving this forecast, focusing on economic disparities and political uncertainties.
Lingering French Political Instability Casts Shadow Over Eurozone
Political turbulence in France continues to weigh heavily on the Euro. Months after snap elections, the nation grapples with uncertainty, mirroring the underperformance of the French CAC stock index compared to other European benchmarks. The French Prime Minister’s warnings of a potential financial “storm” highlight the severity of the situation should budget proposals face rejection from lawmakers.
Marine Le Pen’s far-right National Rally is exacerbating the fragile political landscape. Their intensified pressure on the coalition government, threatening to withdraw support over budget revisions to address France’s widening deficit, adds significant risk. Le Pen’s ultimatum for budget strategy changes further underscores the precariousness of the current political equilibrium.
This budget deadlock has pushed the French government to a critical juncture as they struggle with fiscal imbalances. Prime Minister Barnier now faces a no-confidence motion initiated by Le Pen’s party, demonstrating the real threat of governmental collapse if their demands are not met. The crisis, triggered by President Macron’s snap election call following losses to the National Rally in European elections, has resulted in a hung parliament, deepening the pre-existing political stalemate and impacting investor confidence in the Euro.
Eurozone Consumer Sentiment and Spending Show Signs of Weakness
Recent economic data from the Eurozone presents a mixed picture, but concerning trends are emerging, particularly regarding consumer health, a critical driver of economic growth.
- Eurozone Inflation: Headline CPI inflation saw a slight increase to 2.3% from 2.0%, meeting expectations. Core CPI remained stable at 2.7%, contrary to anticipated slight increases. German import prices rose by 0.6% month-on-month, exceeding forecasts and indicating potential future inflationary pressures.
- German Consumer Activity: Retail sales in Germany experienced a significant contraction, falling by 1.5% month-on-month, substantially below the -0.5% forecast. Although the previous month’s data was revised upwards (from 0.9% to 1.6%), this revision only partially offsets the current downturn. German unemployment figures were less negative than expected, with 7,000 new jobless claims against a projected 20,000.
- French Consumer Spending: Consumer spending in France declined by 0.4% month-on-month, exceeding the anticipated -0.1% decrease, signaling weakening domestic consumption. Conversely, French GDP growth met expectations, expanding by 0.4% quarter-on-quarter.
Despite some resilience in employment figures, the declines in retail sales and consumer spending reflect increasing strain on household finances across the Eurozone. This raises serious questions about the sustainability of economic growth reliant on consumer spending.
Adding to the negative outlook, Germany’s GfK Consumer Climate index unexpectedly fell to -23.3 this week, signaling a resurgence of pessimism among German consumers. This decline follows a prior drop in the German IFO Business Climate index, a key indicator of business sentiment, painting a concerning picture for Europe’s largest economy.
Mounting fears of a potential winter recession, coupled with significant political uncertainties in both Germany and France, darken the economic forecast for the Eurozone. This combination of factors supports a continued bearish outlook for the EUR/USD pair. The economic weakness in the Eurozone suggests a greater likelihood of European Central Bank (ECB) rate cuts compared to the US Federal Reserve (Fed). Even with a potential December rate cut by the Fed not fully priced in, and future rate cut expectations post-Trump election remaining uncertain, the Eurozone’s economic vulnerabilities present a stronger case for ECB action, further weakening the Euro against the Dollar.
EUR/USD Technical Analysis Points to Continued Bearish Trend
From a technical perspective, the EUR/USD is currently testing the resistance zone around 1.0595-1.0610. This area is proving to be a critical juncture. As long as this zone holds as resistance, the bearish outlook remains intact. Key support to monitor is near the 1.0500 level, recently reclaimed. A break below the 1.0450 area could signal a resumption of the downtrend, potentially targeting the 1.0300 level. Conversely, a decisive break above the 1.0600 resistance might trigger a short-covering rally towards 1.0700. However, the overarching technical trend currently favors continued downside pressure on the EUR/USD.
— Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
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