EUR/USD: Euro bulls should not be complacent after French election

• Sovereign recognition hazard remains elevated successful France contempt yesterday’s rallies seen successful the EUR/USD, CAC 40 & DAX ex-post archetypal circular of the French legislative election.
• Speculative nett superior outflows & bearish sentiment successful CAC 40 & DAX whitethorn trigger a antagonistic feedback loop into the EUR/USD.
• EUR/USD astatine hazard of breaking down beneath 1.0656

The EUR/USD gapped up by 26 pips astatine the commencement of yesterday, 1 July Asian league from past Friday, 28 June US league adjacent of 1.0713 connected a affirmative backdrop that preliminary results of the archetypal circular of the French authorities predetermination that saw Le Pen’s far-right National Rally enactment took the pb but without a bulk foothold up of the far-left conjugation party, New Popular Front portion French President Macron’s centrist confederation dwindled to 3rd place. The National Rally enactment fell abbreviated of obtaining the implicit bulk of 289 seats to power the French Parliament.

Together with quality travel that reported horse-trading activities person taken spot betwixt the far-left and Macron’s centrist enactment to forestall Le Pen’s National Rally from securing a bulk foothold successful the upcoming 2nd circular of voting that occurs this Sunday, 7 July, the EUR/USD rallied further during the commencement of yesterday’s European league to people an intraday precocious of 1.0777, that’s summed up to an intraday summation precocious watermark of +64 pips/+0.60% from past Friday, US league close.

Similar intraday affirmative performances tin besides beryllium observed connected the benchmark banal indices for France and Germany wherever the CAC 40 and DAX recorded an intraday summation precocious watermark of +1.91% and +1.24% from their respective closing levels of past Friday.

Reversal of yesterday’s intraday gains successful the EUR/USD, CAC 40 & DAX

However, these intraday rallies cannot beryllium maintained, and the EUR/USD ended yesterday’s session,1 July with a meagre regular summation of conscionable +0.25%, and a akin reversal tin besides beryllium seen connected the French and German banal markets wherever the CAC 40 and DAX pared backmost astir 50 percent oregon much of their aboriginal intraday gains yesterday to grounds closing regular gains of +1.09% and +0.30% respectively.

Sovereign recognition hazard remains elevated successful France

Fig 1: Yield dispersed of 10-year French & German authorities bonds arsenic of 2 Jul 2024 (Source: TradingView, click to enlarge chart)

Even though, the output dispersed betwixt the 10-year France and German sovereign enslaved has inched little somewhat to 0.765% astatine this clip of the penning from a 12-year precocious of 0.82% printed past Thursday, 27 June; it remains astatine an elevated level according to its inclination analysis.

The output dispersed is inactive evolving wrong a short-term uptrend signifier aft a large bullish breakout that occurred connected the week of 10 June 2024 arsenic it remains supported astatine 0.72% which corresponds to a rising 20-day moving mean with the adjacent medium-term absorption coming successful astatine 0.98% (see Fig 1).

Also, if Macron’s centrist confederation decides to enactment the far-left coalition, the New Popular Front enactment present successful 2nd spot aft the archetypal circular of voting with a projected ballot stock of 28% to 29%, it whitethorn let the far-left enactment an easier maneuver summons successful the France parliament to advocator their much assertive fiscal spending policies and taxation cuts arsenic compared to the far-right which successful crook is apt to widen France’s past twelvemonth excessive fund shortage of 5.5% that breached EU’s benchmark fund shortage ceiling of 3%.

Therefore, the enslaved vigilantes are inactive connected the lookout for a imaginable uptick successful recognition hazard successful France which successful crook whitethorn dispersed to the wider Eurozone owed to the contagion effect arsenic European banks bash person important holdings of French sovereign bonds since France is 1 of the economical anchors successful the EU different than Germany.

Current short-term bearish trends successful CAC 40 & DAX inclination whitethorn trigger antagonistic sentiment towards the Euro

Fig 2: France CAC 40 medium-term trend  arsenic of 2 Jul 2024 (Source: TradingView, click to enlarge chart)

Fig 3: Germany DAX medium-term trend  arsenic of 2 Jul 2024 (Source: TradingView, click to enlarge chart)

As seen successful the regular method charts of the French CAC 40 and German DAX, some of them are inactive evolving successful short-term bearish trends arsenic their respective terms actions stay beneath their respective downward-sloping 20-day moving averages with bearish momentum conditions seen successful their regular RSI momentum indicators.

Interestingly, yesterday’s terms actions of the CAC 40 and German DAX person shaped regular cardinal bearish reversals close beneath their respective cardinal short-term pivotal resistances of 7,725 and 18,465 respectively (see Fig 2 & 3).

The short-term movements successful the FX marketplace are besides impacted by short-term speculative equities-related superior flows. Given the prevailing short-term bearish trends that are inactive intact connected the CAC 40 and DAX, successful turn, whitethorn spot nett short-term superior outflows that tin apt trigger a double-whammy antagonistic interaction connected the EUR/USD astatine slightest connected a short-term skyline from some flows and sentiment perspectives.

Watch the 1.0770/0790 cardinal short-term absorption connected EUR/USD

Fig 4: EUR/USD short-term inclination arsenic of 2 Jul 2024 (Source: TradingView, click to enlarge chart)

Current terms actions of the EUR/USD person wiped retired yesterday’s post-French predetermination results-induced rally aft a bearish reversal close astatine the intersection of each 3 cardinal moving averages (20-day, 50-day, and 200-day), and the 4-hour RSI momentum indicator has flashed retired a bearish information (see Fig 4).

These observations from a method investigation position suggest debased likelihood of a imaginable betterment oregon bottoming configuration astatine play for the EUR/USD.

If the 1.0770/0790 cardinal short-term pivotal absorption holds, a interruption beneath 1.0656 enactment (lower bounds of the “Symmetrical Triangle” scope from 3 October 2023 low) whitethorn trigger further downside unit to exposure the adjacent intermediate supports astatine 1.0620/0600 and 1.0530.

However, a clearance supra 1.0770/0790 negates the bearish code for a compression up towards the precocious bounds of the “Symmetrical Triangle “range to spot the adjacent intermediate resistances coming successful astatine 1.0815, 1.0850, and 1.0925/0940.

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