- The bears’ control over the EUR/USD pair continues, and it is stable around the 1.0730 support level at the time of writing the analysis.
- It has been moving in narrow ranges since the start of this week’s trading, which is dominated by the US holiday.
- Concurrently, the euro price is still on its way to further losses if political tensions in the eurozone escalate.
In this regard, researchers at MUFG Bank say that the euro price has a risk premium of around 1.0% due to the uncertainty surrounding the French elections. This would indicate that political uncertainty has left the single European currency undervalued compared to its typical drivers, especially the flow of economic data. Although concerns about the rise of the National Rally party in the French legislature have somewhat subsided this week, this issue is still seen as a constraint on the euro.
Moreover, Derek Halpenny, Head of FX Research at MUFG Bank, says: “Elevated political risks in Europe are certainly a drag on the euro, and EUR/USD was likely to bounce back somewhat yesterday after weaker-than-expected US retail sales data.”
According to forex trading platforms, EUR/USD hit a low of 1.0667 last week as markets digested the implications of French President Emmanuel Macron’s call for early legislative elections. The pair had recovered from its lows and risen following US retail sales data on Tuesday, but gains were capped at the 1.0740 level.
According to analysts’ expectations, the euro has stabilized thanks to evidence that investor concerns about rising political anxiety in France have receded somewhat. Based on price action since President Macron’s early elections, we estimate through swap team movements that there is currently a risk premium of approximately 1% priced into the euro.”
However, this risk premium may limit the potential for a EUR/USD recovery in the coming days, with most analysts looking to contain the exchange rate within the 1.07 range in the short term. Also, the market has stabilized on the belief that the National Front party will be constrained by the expected outcome of the hung parliament, which markets currently see as the most likely outcome of the vote.
Today’s economic calendar results: German producer prices fall to lowest level in 11 months
German producer prices fell by 2.2% year-on-year in May 2024, below the previous month’s decline of 3.3% and against market expectations of a 2.0% decline. Historically, this was the 11th consecutive month of producer price deflation but the lowest figure in the sequence, amid falling energy prices (-6.4%), particularly natural gas (-16.3%) and electricity (-11.3%). At the same time, the cost of intermediate goods fell by 1.8%, with paper products (-6.1%), basic chemicals (-4.9%), wood products (-4.5%), and metals (-4.1%) leading the declines.
On the other hand, prices of capital goods rose by 2.4%, mainly due to machinery (2.6%) and motor vehicles, trailers and semi-trailers (1.6%). Also, the cost of non-durable consumer goods rose by 0.4%, mostly confectionery (21.7%) and butter (21.4%). Furthermore, prices of durable consumer goods rose by 0.7%. Excluding energy, producer prices remained unchanged since May 2023. On a monthly basis, producer prices were unexpectedly flat, compared to a 0.2% increase in April and estimates of a 0.3% growth.
EUR/USD Technical analysis and forecast:
According to the performance on the daily chart, the Euro vs US Dollar EUR/USD price is still moving in a downward correction range. If the European political crises worsen, it is not unlikely that the Euro Dollar will move towards the psychological support level of 1.0500. Technically, the current situation and if any gains occur for the Euro Dollar, it may collapse quickly. The closest resistance levels for the currency pair are currently 1.0775 and 1.0830, respectively.
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