Euro faces post-French election uncertainty – London Business News | Londonlovesbusiness.com

The US dollar has been under pressure since late June and has settled near its lowest point in nearly a month against major currencies, following a weaker-than-expected jobs report last Friday.

This has raised speculation that the Federal Reserve might cut interest rates in September.

Traders are awaiting Federal Reserve Chair Jerome Powell’s upcoming testimony before Congress and the release of consumer price data for further insights into future US interest rate decisions.

The market’s focus will be on how Powell communicates the risks between stubborn inflation and a slowing labor market, as well as the generally slowing economy.

A dovish tone could lead markets to increase their bets further on a September rate cut, which may push the dollar even lower. Higher expectations of rate cuts and more dovish comments could confirm a softer monetary policy outlook and could drive Treasury yields lower, thereby putting further pressure on the dollar.

In Europe, the euro stabilized after volatile trading on Monday, driven by political uncertainty following France’s hung parliament.

Despite this, the European currency remained near recent highs. The surprise victory of France’s leftist New Popular Front (NFP) alliance in the recent election has increased investor caution, particularly in the bond market. With the NFP failing to secure an absolute majority, the hung parliament complicates government formation and policy enactment.

This political uncertainty has sustained a significant risk premium for French debt compared to German equivalents. Although slightly reduced from peak levels, investor sentiment towards French bonds remains cautious, suggesting that the spread between French and German bonds may not return to pre-election levels soon. Continued volatility in the French bond market is expected, potentially widening the spread further if political uncertainty persists.