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Forex Market Analysis: Euro Lower Amid French Election Shock

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CURRENCIES

Euro (EUR/USD) analysis:

• French bond yields starting to move higher.
• Euro edges lower as markets wait for specifics.

French election results and market impact:

• The recent French election resulted in a shock, leaving financial markets vulnerable.
• Contrary to expectations of a strong showing by the far-right National Rally (RN) party, the left-wing New Popular Front coalition made significant gains, securing the most seats in the National Assembly.
• President Emmanuel Macron’s centrist alliance, Ensemble, underperformed but still placed second, ahead of the RN.

Political instability and market reactions:

• Resulted in a hung parliament with no outright majority.
• Likely governance challenges as Macron’s party will need to form alliances or negotiate to pass legislation.
• Jean-Luc Melenchon, leader of the New Popular Front, demands the resignation of the French prime minister and for NFP to govern.

Market movements:

• French asset markets unchanged to marginally lower in early trade.
• CAC 40 attempting to push higher but gains may be limited pending further news on government composition.
• French borrowing costs elevated, potentially rising further due to proposed spending by Melenchon, including lowering the pension age to 62 and increasing the minimum wage.

Euro post-election:

• The Euro remains relatively calm post-election, holding last week’s gains.
• Benefitting from US dollar weakness, with potential to drift towards 1.0900 against the US dollar in a calm period ahead.

Trader sentiment and EUR/USD:

• Retail trader data shows 36.57% of traders are net-long, with a short to long ratio of 1.73 to 1.
• The number of traders net-long is significantly lower compared to yesterday and last week.
• Traders net-short positions have increased, indicating a contrarian bullish trading bias for EUR/USD prices.

STOCK MARKET

Key events and reports:

• Tuesday and Wednesday: Semiannual testimony from Federal Reserve Chair Jerome Powell before the Senate Banking Committee and the House Financial Services Committee.
• Thursday: Release of June’s Consumer Price Index (CPI).
• Friday: Second quarter earnings season begins with reports from JPMorgan (JPM), Wells Fargo (WFC), and Citi (C). Additional reports from PepsiCo (PEP) and Delta Air Lines (DAL) earlier in the week.

Market performance last week:

• S&P 500 (^GSPC): +2%, finished at record highs.
• Nasdaq Composite (^IXIC): +3%, finished at record highs.
• Dow Jones Industrial Average (^DJI): +0.5%, noted as a laggard.

 June jobs report:

• The US economy added more jobs than expected, but details show signs of a slowing labor market.
• Unemployment rate rose to 4.1%, highest since November 2021.
• April and May job gains were revised lower by 111,000.
• Economists predict this will lead the Federal Reserve to cut interest rates in September.

Economist insights:

• Nancy Vanden Houten (Oxford Economics): June jobs report shows labor market cooling, supports forecast for Fed rate cuts in September.
• Neil Dutta (Renaissance Macro): Report firmed up expectations for a September rate cut, suggesting Powell will set up for this in July.

Investor sentiment:

• As of Friday, 75% of investors expect a rate cut by the Fed’s September meeting, up from 64% the previous week (CME’s FedWatch Tool).

Inflation and CPI report:

• Inflation readings in May showed the slowest price increases of 2024.
• June CPI report expected to show a 3.1% annual rise, down from May’s 3.3%.
• Core CPI (excluding food and energy) expected to rise 3.4% year-over-year, unchanged from May.

Earnings season:

• Financials (XLF) will be a focus, with 40% of S&P 500 companies reporting.
• Sector expected to see 4.3% year-over-year earnings growth, placing seventh among S&P 500 sectors.
• Regional banks projected to report a 26% decline in earnings growth.

Outlook for Q2 earnings:

• S&P 500 earnings forecasted to grow 8.8% year-over-year, highest since Q1 2022.
• Caution among strategists about upside potential despite record market levels.
• Companies beating expectations saw minimal stock price impact last quarter.

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