French political instability is putting pressure on EUR/USD, increasing investor risk aversion and impacting European stocks, with potential ripple effects across Germany.
Political unrest in France and the weakness of the euro
The EUR/USD pair is under selling pressure as political tensions in France weigh on the euro. Far-right leader Marine Le Pen has issued a strong warning to France's minority government, threatening to oust it by the end of the year unless the country's budget bill is changed. This has increased the likelihood of a vote of no confidence in the French prime minister, which could take place as early as Wednesday.
Political uncertainty has increased risk aversion among investors, leading to pressure on European stocks and rising yields. French Finance Minister Antoine Armand publicly opposed the demands of Marine Le Pen's National Rally, saying France would not be held hostage. However, growing instability has shaken investor confidence, with potential knock-on effects expected across Europe, particularly in Germany, where political fragility is also looming.
The strength of the US dollar and tensions within BRICS
The United States Dollar (USD) is gaining popularity, supported by geopolitical developments and economic factors. One of the main factors behind this rise is President-elect Donald Trump's threat to impose 100% tariffs on BRICS countries if they implement their plan to replace the US dollar as the main trading currency. Trump's comments sparked a swift response from the Kremlin, which warned that such measures could backfire on the U.S. economy.
This assertive stance on the dollar's global dominance has amplified safe-haven demand for the currency, putting additional pressure on the euro and other major currencies. At the same time, the US Dollar Index (DXY), which measures the dollar against a basket of major currencies, rose above pivotal levels, reflecting investors' flight to safe havens amid geopolitical uncertainties and growing economies.
Weak manufacturing data and divergent economic outlook
Data from the Hamburg Commercial Bank (HCOB) indicates continued weakness in Europe's manufacturing sector, with downward revisions to the November manufacturing Purchasing Managers' Index (PMI) for several major economies. The final EU manufacturing PMI was confirmed at 45.2, well below the threshold of 50 that separates growth from contraction.
On the other hand, data from the American manufacturing sector are slightly more optimistic. The November ISM manufacturing PMI is expected to improve slightly to 46.5 from 47.5, signaling a modest recovery. However, this figure remains in contraction territory, indicating that the sector continues to face difficulties. The prices paid index, a leading indicator of inflation, is also expected to rise, reflecting cost pressures in the supply chain.
Additional Factors and Market Implications
- Gold and oil markets: Gold prices fell, reflecting reduced demand for safe-haven assets, while crude oil prices rose ahead of the upcoming OPEC+ meeting. OPEC+ is expected to address supply cuts, with tensions arising from Iranian officials' accusations that prolonged production curbs have fueled an oversupply.
- Interest Rates and Federal Reserve Outlook: The CME FedWatch tool suggests a 67.1% probability of a 25 basis point rate cut at the Federal Reserve's December meeting. Federal Reserve officials including Christopher Waller and John Williams are expected to give their views on the economic outlook, which could further influence market expectations.
Main economic events of the week:
- 12/02/2024 15:00 PMI manufacturier ISM (USD) : It is a key indicator of U.S. manufacturing activity. A higher-than-expected reading could signal stronger economic growth and potential upward pressure on inflation.
- 12/03/2024 07:30 Consumer price index (YoY) (CHF): This is a crucial indicator of inflation in Switzerland. A higher than expected figure could lead to a tightening of monetary policy by the Swiss National Bank.
- 03/12/2024 4:00 p.m. Speech by RBNZ Governor Orr (NZD): Speeches from central bank governors can have a significant impact on market sentiment and exchange rates. Any indication of future monetary policy decisions will be closely monitored.
- 04/12/2024 1:30 p.m. Speech by ECB President Christine Lagarde (EUR): Much like the RBNZ Governor's speech, this event could have a significant impact on the Euro. Any comments on inflation, economic growth or monetary policy will be closely monitored.
- 04/12/2024 6:45 p.m. Speech by Fed President Powell (USD): The Fed Chairman's speech is one of the most important economic events of the year. Any comments on interest rates, inflation or the economic outlook will have a significant impact on the US dollar and global markets.
- 12/05/2024 13:30 Non-agricultural payrolls (USD) : It is a key indicator of job growth and the overall economic health of the United States. A stronger-than-expected result could lead to higher interest rates and a stronger U.S. dollar.
- 06/12/2024 10:00 Gross domestic product (quarter-on-quarter) and (year-on-year) (EUR): It is a key indicator of economic growth in the Eurozone. A stronger than expected figure could boost the euro.
- 12/06/2024 13:30 Non-agricultural wage bills (USD) : (Repeated for emphasis)
- 06/12/2024 3:00 p.m. Michigan Consumer Confidence Index (USD): This index measures consumer confidence in the American economy. A better-than-expected result could boost consumer spending and economic growth.
- 02/12/2024 00:30 SA Retail Sales (MoM) (AUD): It is a key indicator of consumer spending in Australia. A stronger-than-expected result could boost the Australian dollar.
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