Analysts predicted a fall in the euro before the ECB Governing Council meeting on June 6, which cut interest rates by 0.25 basis points ahead of the Federal Reserve.
However, the bloc's currency barely reacted to the event itself, probably because the market had already predicted it in advance, and there were no surprises.
The natural decline began the next day, not as a delayed response to the ECB meeting, but because of the much more robust than expected US employment report.
Expectations of an early Fed rate cut diminished, increasing demand for the US dollar. The DXY chart serves as a confirmation. However, the euro could face even more worrisome developments.
Specifically, political uncertainty in one of the bloc's members. This time, it was not Greece, Spain, or Italy, but France and, in part, Germany, two locomotives of the EU economy.
For those who missed the most significant event last week, President Macron of France dissolved the National Assembly following a defeat in the European Parliament elections.
He also announced early elections for legislative bodies. The first round is set for June 20, and the second round for July 7. Initially, the elections were scheduled for 2027.
The prospects of a shift of power towards conservative parties in the country did not please investors. As a result, the spread between French and German government bonds widened.
French stocks experienced their worst week since 2022. As one of the EU's key economies, France's economic uncertainty could ultimately affect the entire bloc.
Incidentally, Germany is not exactly in good shape either. The country is forced to take on additional debt of up to 11 billion euros to meet its targets.
Turning to France, the obvious question for many is: what difference will it make who wins and who loses? In the U.S., regardless of the election outcome, the market is trending higher in both scenarios.
The changes Le Pen's supporters could bring could lead to such a situation. Historically, her initiatives have been considered populist. For example:
- Lowering the retirement age.
- Raise the minimum wage and eliminate the fuel sales tax.
- Abolish income tax for those under 30 years of age.
However, with a debt-to-GDP ratio of 110% and a budget deficit of 5.5% instead of the 4.9% projected for 2023, the room to increase social spending is limited.
Hence, S&P Global's decision to downgrade France's credit rating from AA to AA- is understandable. If the National Rally comes to power, it is clear that the situation will remain the same.
As for what to expect next, there are a few options: up or down, but certainly to the right. Joking aside, much will depend on the results of the French elections.
Monitoring macro indicators in Europe and the United States is also essential. Slowing inflation in Europe and growth in the US will likely lead to further weakening of the euro.