US Dollar banks on Euro weakness with Europe's political landscape in ruins

The US Dollar adds to Monday's gains and sprints higher on negative European news.
The Greenback jumps after rumors President Macron was considering to resign.
The US Dollar index trades just above 105.00 and flirts with nearby support levels.

The US Dollar (USD) trades further up in the green, above 105.40 on Tuesday, and looks to be booking more gains on external drivers. With its gains from Monday, after French President Emmanuel Macron called for snap elections in June, the sting is being taken out of the event with Marine Le Pen, head of the Far Right movement in France, will not be running in those. Though the DXY rally received another spark with the headline that President Macron was not considering to resign, which markets now interpret as that he actually was considering to resign, additn to more Euro weakness and US Dollar strength.

On the economic front, the US Dollar index (DXY) moves alongside political news out of Europe ahead of Wednesday’s main events: the US Consumer Price Index for May and the Federal Reserve (Fed) interest rate decision. Before that, two very light data elements will find their way to the markets on Tuesday: the NFIB Business Optimism Index for May and the Redbook Index for the first week of June.

Daily digest market movers: Investors fleeing Europe

Headline hitting the wires on Tuesday comes from France, where Marine Le Pen, head of the Far Right movement, said she will not be running in the upcoming snap elections at the end of June. This can be considered as a victory for current French President Emmanuel Macron as his government sees its odds of surviving these snap elections rising with Le Pen now backing down.
Around 10:00 GMT a strange headline emerged on all big news agencies from a person close to the French President Macron, commenting that the President did not consider to resign after the election results. This comment triggered another leg lower in the Euro against its peers, and resulted in an uptick for the US Dollar, with markets reading into this headline as 'where there is smoke, there is fire', presuming that the French President had considered to resign on Sunday.
The Eurozone is cracking under pressure as well, with a broad bond sell off in the region. The spread between Italian and German bonds is rising with Italian yields rising quicker than German ones. Broading or widening yield spreads in the eurozone are often seen as stress and a negative sign in global markets.
At 10:00 GMT, the National Federation of Independent Business (NFIB) has released its Business Optimism Index for May. The result was a beat on expectation an the previous print of 89.8, with 90.5 as number for May.
At 12:55 GMT, the Redbook Index for the week ending June 7 was issued. The previous reading was at 5.8%, with the current number coming in at 5.5%.
The US Treasury is set to unleash some debt to the markets
- 52-week bill auction expected at 15:30 GMT.
- 10-year Note Auction will be allocated at 17:00 GMT.
Equities are taking a turn for the worse with all European equities on the back foot caused by widening spreads between countries in the Eurozone and that comment on French President Macron not considering resignation. All European equities are down by 1%, US futures are down by a quarter of a percentage.
The CME FedWatch Tool shows a 45.6% chance of the Federal Reserve (Fed) interest rate at the current level in September. Odds for a 25 basic points rate cut stand at 50%, while a very slim 4.4% chance is priced in a 50 basic points rate cut
The benchmark 10-year US Treasury Note slides to the lowest level for this week, near 4.45%, and flirts with further declines.

US Dollar Index Technical Analysis: Reaching higher

The US Dollar Index (DXY) could be summarised with one word on Tuesday: Yawn! Expect no big movements, with markets remaining sidelined ahead of the main US events for this week on Wednesday.

On the upside, there are some technical or pivotal levels to watch out for. The first is 105.52, a level that held support during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.

On the downside, a trifecta of Simple Moving Averages is now playing as support. First, and very close, is the 55-day SMA at 105.05. A touch lower, near 104.47, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines in the US Dollar index. Should this area be broken down, look for 104.00 to salvage the situation.

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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