US political events take center stage in coming weeks + More

EUR/USD holds ground despite weak German data

by Faruk Imamovic
US political events take center stage in coming weeks + More
© Getty Images/Scott Olson

In the world of finance, attention is currently focused on Asian markets, where traders are watching closely for signs of possible intervention by Japanese officials in the currency market. The reason for this is the fact that the exchange rate of the US dollar against the Japanese yen (USD/JPY) has once again approached the level of 160, which is reminiscent of the situation at the end of April and the beginning of May when the intervention took place.

However, experts believe that this time the situation could be different. The 160 level may not face the same resistance as before. The reason for this is the more gradual growth of the USD/JPY exchange rate lately. Also, the Japanese Ministry of Finance usually raises its offer in each subsequent episode of intervention to avoid the perception that it is "capping" the exchange rate at a certain level.

Given the limited resources for unilateral interventions, policymakers may choose to maximize the impact of the intervention by selling dollars when market liquidity is low, such as late Fridays in New York or near public holidays. So for now, we are more likely to see a verbal intervention, at least until we get closer to the very end of the week.

This week won't bring many major macroeconomic announcements, at least not until Friday, when we get US PCE PI inflation data and Eurozone Consumer Price Index (CPI) reports. However, this morning we received the Ifo business climate report from Germany, which shows that business sentiment fell in June, with the main index falling to 89.0 in June (from 90.4 in May). This is mainly due to the worsening business expectations of respondents.

Despite this, the EUR/USD exchange rate is holding its ground, perhaps because the May Ifo report is considered outdated, given that it was preceded by the preliminary PMI surveys for June released last Friday. Those PMI surveys also showed a similar decline in measures of business activity for Germany in June.

EUR/USD© Getty Images/Matt Cardy

Challenges of German industry

As we noted last week after looking at PMIs, it's hard to be structurally optimistic about German industry struggling with a six-year pullback. That retreat stems from several key factors:

  • 1. Energy shortages faced by the country
  • 2. Public-political imperative for decarbonization and related costs
  • 3. Loss of demand for capital goods as construction in China slows
  • 4. Increased competition in manufacturing from the US, as US capacity grows thanks to tax subsidies and other incentives
  • 5. Drastic loss of global market share in the automotive industry to China

These factors explain why calls for protectionism in the EU have increased. The latest reports indicate growing concern among European leaders about these trends.

Politically charged period

Although no significant economic data will be released until Friday, this week marks the beginning of a politically charged three-week period. It will include important televised pre-election debates in France, the UK and the US, followed by actual national elections in France (June 30 and July 7) and the UK (July 4).

For both elections, polls and events suggest that electoral trends are unchanged - the Conservative Party in the UK continues to lose popularity, while France's National Alliance continues to gain ground in the polls. It is important to note that the weekend brought new signals that the National Alliance may not be as fiscally irresponsible as we and others feared. Its leader, Jordan Bardella, said his party "aims to return the country to budgetary sanity", signaling a more conservative approach to public finances. And this could be the reason why EUR/USD gained in value this morning.

Emmanuel Macron
Emmanuel Macron© Getty Images/Aurelien Meunier

Political events in the USA

After this week, the sentencing of former US President Donald Trump is scheduled for July 11, just before the start of the Republican Party convention, which takes place from July 15 to 18. By the end of that convention, we'll know who Trump's running mate will be. That choice will be a key determinant of his success in the general election in November.

Central banks in focus

Aside from political events, the main thing to watch this week will be occasional speeches from officials from the Federal Reserve (Fed) and the European Central Bank (ECB). In Fed speeches, one should pay attention to any tonal changes that could indicate a slower US economy (especially in the labor market) and suggest a softer position by key FOMC members.

Of note are recently released data suggesting that initial unemployment insurance claims are breaking through their low and stable levels. Although the shift in labor market indicators (for now) appears to be temporary, initial claims are at levels around 18% above cyclical lows, while continuous claims are more than 30% above cyclical lows. Whether or not Fed speakers acknowledge this change could be a key driver for the USD this week.

Of course, this must be placed in the context of the speeches of other central banks. For example, the ECB's Philip Lane will speak at a monetary policy conference on Wednesday. Meanwhile, the US Treasury will hold two-year and five-year bond auctions on Tuesday and Wednesday, which could set the pace for medium-term USD yields.