Euro knocked by French election jitters

What’s been happening?

The euro was placed on the defensive over the past couple of weeks. The bulk of these losses have been driven by French political jitters, after President Emmanuel Macron shocked markets by calling for snap parliamentary elections.

The pound also faced resistance in recent weeks. The most notable pressure came from the Bank of England (BoE) in the wake of its latest interest rate decision. While the bank left rates on hold, it also signalled its decision was ‘finely balanced’.

Meanwhile the US dollar trended broadly higher over the past couple of weeks. While initially facing some pressure after a softer-than-expected US inflation print, USD exchange rates then rebounded amid growing confidence the Federal Reserve will only deliver a single rate cut this year.

What do you need to look out for?

Looking ahead, volatility in the euro may become more pronounced in the next couple of weeks as the people of France go to the polls. If the far-right is able to wrestle control of parliament, it’s likely the single currency will come under notable pressure.

The UK will also go to the polls at the start of July. A labour victory is largely priced in so any volatility in the pound may be minimal, unless any last-minute surprises throw the race open again.

In the meantime, the focus for USD investors will be on the latest core PCE price index. Will a slowdown in the Fed’s preferred measure of inflation act as a headwind for the US dollar?