empty
01.10.2024 03:33 PM
The Euro Underestimated the Risks

Troubles never come alone. Israel's military operation against Hezbollah has increased demand for the U.S. dollar as a safe-haven asset, while the standoff between the new French government and parliament is raising political risk in Europe and putting pressure on the euro. When we add the drop in eurozone inflation below the 2% target, which pushes the ECB towards a rate cut in October, the collapse of the EUR/USD begins to make sense.

In a region where power is the primary language, Israel's ground operation against Hezbollah leaves a mixed impression. On one hand, Jerusalem's superiority is beyond doubt. On the other hand, the Israeli army risks becoming entangled in Lebanon, and Iran could be drawn into the conflict. If the conflict escalates, we can expect rising oil prices and increased demand for safe-haven assets. What is happening now with the EUR/USD is just the beginning.

The slowdown in European inflation from 2.2% to 1.8% was widely anticipated after consumer price growth rates fell in the leading economies of the eurozone. The ECB forecasts that CPI indices will rise by the end of the year. But what if they do not? If deflation returns to the eurozone, the deposit rate may need to be cut sharply, perhaps even to zero. Under such circumstances, the EUR/USD could experience a significant decline.

European Inflation Trend

This image is no longer relevant

Meanwhile, foreign investors are actively selling French stocks and bonds, leading to a sharp rise in the yield spread between French and German bonds. This indicates an increase in political risk, especially in light of the first clash between the new French Prime Minister and parliament. The Prime Minister, faced with a minority government, risks facing a vote of no confidence from lawmakers at any moment.

There are plenty of reasons for this. Despite announcing an increase in the budget deficit from 4.4% to 6% of GDP, the new Prime Minister intends to reduce this figure to the 3% required by the European Union. Achieving this goal would require raising taxes, a highly unpopular measure that could provoke the anger of both right-wing and left-wing parties controlling the National Assembly.

Yield Spread Dynamics Between French and German Bonds

This image is no longer relevant

Contributing to the EUR/USD decline is the reduced probability of a 50 basis point rate cut by the Federal Reserve in November, which fell from 50% to 37% following Jerome Powell's speech. The Fed Chairman stated that the central bank does not feel a sense of urgency and that its policy will depend on data.

This image is no longer relevant

Thus, the rise in geopolitical risks in the Middle East, combined with political risks in Europe, the increasing likelihood of continued monetary expansion by the ECB, and the Fed's cautious stance, are pushing the main currency pair downward.

Technically, on the daily EUR/USD chart, the inability of the bulls to stay above the upper boundary of the fair value range of 1.1045-1.118 indicates their weakness. Control has shifted to the bears. However, a rebound from the support levels at 1.1065 and 1.1045 should be seen as an opportunity for buying.

Marek Petkovich,
Analytical expert of InstaForex
© 2007-2025
Select timeframe
5
min
15
min
30
min
1
hour
4
hours
1
day
1
week
Earn on cryptocurrency rate changes with InstaForex
Download MetaTrader 4 and open your first trade
  • Grand Choice
    Contest by
    InstaForex
    InstaForex always strives to help you
    fulfill your biggest dreams.
    JOIN CONTEST

Recommended Stories

The Dollar and Stock Market Crash Continues (AUD/USD May Keep Rising While USD/JPY Declines Further)

While Europe and parts of Asia continue celebrating Easter and political life has temporarily paused, in the U.S., the "Make America Great Again" trend set by Donald Trump continues

Pati Gani 09:04 2025-04-21 UTC+2

What to Pay Attention to on April 21? A Breakdown of Fundamental Events for Beginners

No macroeconomic events are scheduled for Monday—not in the U.S., the Eurozone, Germany, or the U.K. Therefore, even if the market was paying attention to the macroeconomic backdrop, today, there

Paolo Greco 06:30 2025-04-21 UTC+2

GBP/USD Overview – April 21: The Inertial Growth Continues

The GBP/USD currency pair continued its upward movement on Friday. If we had seen such price action away from peak levels, there would have been no questions. In essence

Paolo Greco 04:01 2025-04-21 UTC+2

EUR/USD Overview – April 21: The Market Sleeps, Only Trump Can Wake It Up

On Friday, the EUR/USD currency pair made no notable movements whatsoever. This was unsurprising, as Friday marked Good Friday, and Sunday was Easter. Many banks and trading venues were closed

Paolo Greco 04:01 2025-04-21 UTC+2

US Dollar: Weekly Preview

Is there light at the end of the tunnel? The US dollar will again try to answer that question in the new week. To briefly recap: over the past

Chin Zhao 01:01 2025-04-21 UTC+2

British Pound: Weekly Preview

Several fairly interesting reports were released in the UK, but they almost did not impact market participants' actions. Demand for the British pound increased on all five days except

Chin Zhao 01:01 2025-04-21 UTC+2

Euro: Weekly Preview

There were very few changes regarding the euro last week. We observed horizontal movement for most of the week, which naturally did not affect the current wave markup. I want

Chin Zhao 01:00 2025-04-21 UTC+2

Trump targets Powell

Yesterday, US President Donald Trump stated that he could dismiss Federal Reserve Chairman Jerome Powell, casting doubt on the idea of central bank independence. He also expressed frustration that policymakers

Jakub Novak 14:42 2025-04-18 UTC+2

EU increases pressure on US

The entire world is now watching the ongoing negotiations between the US and its key trading partners. Despite President Trump's loud claims that the talks are going well, there

Jakub Novak 14:04 2025-04-18 UTC+2

The Market Taken Hostage

Will the White House cross the Rubicon by initiating the dismissal of Jerome Powell from his position as Chair of the Federal Reserve? That would deal another blow to financial

Marek Petkovich 09:16 2025-04-18 UTC+2
Can't speak right now?
Ask your question in the chat.
Widget callback
 

Dear visitor,

Your IP address shows that you are currently located in the USA. If you are a resident of the United States, you are prohibited from using the services of InstaFintech Group including online trading, online transfers, deposit/withdrawal of funds, etc.

If you think you are seeing this message by mistake and your location is not the US, kindly proceed to the website. Otherwise, you must leave the website in order to comply with government restrictions.

Why does your IP address show your location as the USA?

  • - you are using a VPN provided by a hosting company based in the United States;
  • - your IP does not have proper WHOIS records;
  • - an error occurred in the WHOIS geolocation database.

Please confirm whether you are a US resident or not by clicking the relevant button below. If you choose the wrong option, being a US resident, you will not be able to open an account with InstaForex anyway.

We are sorry for any inconvenience caused by this message.