EUR/USD. Can the Southern Impulse Be Trusted?

[Ben Graham]

On Wednesday, the euro-dollar pair attempted to break into the 1.15 range, testing the support level at 1.1610. At this price point, the lower boundary of the Kumo cloud coincides with both the upper edge and the Bollinger Bands line on the D1 time frame. This price movement is due to the simultaneous strengthening of the U.S. dollar and weakening of the euro. The news flow from both sides of the Atlantic is indeed exerting pressure on the EUR/USD pair.

The European currency is under pressure due to developments in France. Much to the disappointment of EUR/USD buyers, the political crisis in France continues to deteriorate — the latest resignation of another prime minister has not yet been followed by a swift replacement, at least for now. It has been reported that on Wednesday evening (i.e., during the U.S. trading session), President Emmanuel Macron will make an important statement, the subject of which remains confidential. Formally, this marks the end of the 48-hour deadline Macron gave former Prime Minister Sebastien Lecornu to negotiate with political forces. Macron may appoint a new prime minister—likely someone from the center-left. This would be the least radical step (likely to be positively received by the euro), but it would be a negative outcome for Macron himself, since it would mean he would have to compromise on some key reforms (most notably, the pension reform).

Therefore, some analysts have suggested that Macron might announce the dissolution of the National Assembly—the lower house of the French parliament—on Wednesday evening, given the indirect signs indicating the likelihood of this scenario.

According to French newspaper Le Figaro, Macron held two meetings on Tuesday with high-ranking politicians: the speaker of the National Assembly, Yael Braun-Pivet, and the Senate speaker, Gerard Larcher. On the one hand, such consultations are non-binding — Macron could simply be seeking a solution through talks with influential officials. On the other hand, these consultations are legally required before dissolving the lower house of parliament. This is explicitly stated in Article 12 of the French Constitution.

The political intrigue continues, and EUR/USD traders are clearly nervous, adding further pressure to the pair. After all, according to all polls, the far right is expected to significantly strengthen its position in parliament if early elections are held. Marine Le Pen's National Rally could gain around 220 seats, while the party currently has just 125 seats in the lower chamber. Although the right is unlikely to obtain an outright majority, its political influence would be significantly greater than it is now. France is the second-largest economy in the EU and the eurozone; amid overall uncertainty, the euro has come under substantial pressure.

Additional pressure on the euro came from German industrial order data. Since May of this year, this indicator has been in negative territory; however, in August, orders were expected to increase by 1.3% month-over-month (m/m), following a 2.7% decline in July. Contrary to forecasts, however, they decreased by 0.8%.

Meanwhile, the dollar index is showing upward momentum, despite the ongoing government shutdown in the U.S. This dynamic is partly driven by the French political crisis, which has triggered a spike in risk-off sentiment. Japan has also played a role, where former Interior Minister Sanae Takaichi, a supporter of "Abenomics" and dovish monetary policy, won intra-party elections. There are growing (and well-founded) concerns in the markets that if she becomes prime minister, she may push for greater fiscal expansion and slower interest rate hikes.

Against the backdrop of these major developments, interest in risk assets has diminished, while the safe-haven dollar is once again in high demand.

In addition, the U.S. dollar received support from the results of a survey published yesterday by the New York Federal Reserve Bank. According to the results of this monthly survey, Americans' inflation expectations for the coming year rose in September to a five-year high of 3.4% (up from 3.2% in the previous month). Expectations for food inflation also increased to 5.8% (from 5.5% the prior month). This is the highest reading since March 2023.

These factors help explain why the EUR/USD pair has been declining for three consecutive days. But are they sufficient to sustain a lasting downward trend? In my opinion, the pair is falling on too shaky a foundation — especially considering the ongoing government shutdown in the U.S. For instance, if Emmanuel Macron announces the appointment of a new prime minister, the euro could receive significant support (even though the underlying political crisis in France would remain unresolved). Likewise, although Sanae Takaichi won the intra-party election, she has yet to become Japan's prime minister — the parliamentary session has been postponed until at least October 20 due to a deadlock in coalition talks with the Komeito party.

At the same time, the U.S. shutdown could escalate at any moment due to mass layoffs of federal employees, who are currently on unpaid leave.

All of this suggests that, with regard to the EUR/USD pair, it is wise to maintain a wait-and-see approach — at least until Macron's speech, which will either bring an end (or an ellipsis) to the political crisis, or "open Pandora's box" by dissolving the National Assembly. On the brink of such significant — even fateful — developments, any trading decision appears overly risky.

The material has been provided by InstaForex Company - www.instaforex.com