FOREX Fundamental analysis for EUR/USD on July 16, 2024
Difficult political events, such as the French elections, could weaken the euro, but in the current situation they rather support EUR/USD. Officials of the European Central Bank (ECB) fear that the generous fiscal policy of the new French government will accelerate inflation. This makes it difficult for small countries to comply with EU rules if large states like France and Italy ignore them. In this regard, it is unlikely that the ECB will signal monetary policy easing at the July meeting, which has a positive effect on the regional currency.
Forex currency trading is subject to fluctuations. In June, traders were choosing between political instability in France and a slowdown in the US economy. In July, the emphasis shifted, and expectations of a weakening of the Fed's policy, as well as the Trump renaissance, came to the fore. The market is confident in the beginning of monetary easing at the September meeting of the Federal Reserve. Moreover, a 50 basis point reduction in the federal funds rate gives a 12% probability.
In addition, Goldman Sachs noted that the conditions for lowering rates were ripe already in July, which increased the probability of three acts of monetary expansion by the Fed in September, November and December to 60%.
The change in investor sentiment was caused by comments from Fed Chairman Jerome Powell and San Francisco Fed President Mary Daley that the FOMC's confidence in achieving the 2% inflation target has increased significantly. But the strongest impact was made by the speech of Ostan Goolsby, head of the Federal Reserve Bank of Chicago, who said that the current tight monetary policy is not justified, since inflation has decreased and real rates have increased. In the context of a slowdown in the labor market and the economy, an easing policy is needed.
This scenario could weaken the US dollar, but it is supported by Trump. After the assassination attempt, Trump's chances of returning to the White House increased from 60% to 67%.
Analysts expect Trump to cut taxes and raise customs tariffs, which could accelerate inflation and force the Fed to delay monetary easing, returning interest in the dollar. The drop in volatility in the stock market indicates confidence in Trump's victory. But much will depend on whether Republicans can control the House of Representatives. UBS estimates the probability of this at 45%.
We can say that the market continues to balance between political and economic factors. A drop in EUR/USD below the support level of 1.088 will increase the probability of a pullback to the 1.0845-1.086 zone. A rebound from this level will allow you to open long positions.