EUR/USD is trading cautiously on Wednesday as the market remains on edge ahead of significant political and economic events. The currency pair has edged lower, holding steady at key support around 1.0500 in European trading hours, with investors focusing on the political situation in France and upcoming US economic data. The uncertainty surrounding a no-confidence vote against Prime Minister Michel Barnier has added to market nervousness, which has been weighing on the Euro (EUR). Additionally, the outlook for the US Dollar (USD) remains a key factor, with US economic data and Federal Reserve statements offering potential for further market movement.
Political Uncertainty in France: No-Confidence Vote Looms
The looming no-confidence vote in France has created an air of uncertainty around the Eurozone's second-largest economy. The French far-right and left-wing parties have united in a vote to remove Prime Minister Barnier from office, adding political instability to the region. The vote is scheduled for later today, and it is expected to stir significant volatility in the Euro. With the French government potentially on the brink of collapse, investors are worried about the impact of a political crisis on the Eurozone's economic stability.
Marine Le Pen’s far-right party announced its intention to vote against the government, and now, Prime Minister Barnier’s survival in the vote depends on whether any members of the left-wing opposition shift their stance. If the no-confidence motion passes, it could lead to a major reshuffle in French politics, further destabilizing the Euro.
US Economic Data and Fed Rate Expectations
While political developments in France dominate the market’s immediate focus, the outlook for the US Dollar is also a key factor influencing EUR/USD price action. Investors are eagerly awaiting data from the US, particularly private employment numbers and the ISM Services PMI for November. The ADP Employment Change is expected to show a slowdown in job growth, with economists forecasting an increase of 150K jobs, down from 233K in October. A softer reading could impact market expectations for the Federal Reserve's interest rate decisions.
Alongside the ADP data, the Services PMI is expected to dip to 55.5, down from 56.0 in the previous reading, indicating a possible slowdown in the services sector, which is a significant component of the US economy. Both data points will likely influence traders’ views on the Federal Reserve’s next steps in its monetary policy meeting on December 18.
Market participants are currently pricing in a 74% chance of a 25 basis point rate cut by the Fed in December, as per the CME FedWatch tool. However, opinions among Fed officials vary, with some, like New York Fed President John Williams, suggesting that the central bank should continue its move toward a more neutral policy setting. Williams emphasized that the Fed's path would remain data-dependent, further adding to the uncertainty surrounding future rate cuts.
ECB’s Interest Rate Policy and Mixed Views on Tariffs
In Europe, the outlook for the European Central Bank (ECB) continues to weigh on the Euro. ECB policymakers, including Austrian Central Bank Governor Robert Holzmann, have indicated that a 25 basis point rate cut is likely at the upcoming ECB policy meeting on December 12. Holzmann's comments have led to speculation that further rate cuts are on the table, which could keep downward pressure on the Euro. Holzmann suggested that, given current data, a reduction of 0.25 percentage points is a realistic expectation. However, opinions on the economic outlook remain divided within the ECB.
For example, ECB board member Piero Cipollone expressed concerns that US tariffs, particularly those announced by President-elect Donald Trump, could undermine economic growth. He believes that tariffs could result in lower consumption and reduced inflationary pressure, which would necessitate continued easing by the ECB.
Technical Analysis: EUR/USD Holding Key Support
From a technical standpoint, EUR/USD remains in a consolidative phase, trading near the 1.0500 level. The major currency pair has been fluctuating within a narrow range, reflecting uncertainty in both economic and political spheres. Short- and long-term exponential moving averages (EMAs) are all pointing lower, indicating a bearish trend. However, the 14-day Relative Strength Index (RSI) is holding close to the 40.00 mark, suggesting that while bearish momentum persists, it has begun to fade. This implies that the downward pressure on EUR/USD could be weakening, although the overall trend remains skewed to the downside.
Looking ahead, the next significant support level for the Euro is the November 22 low at 1.0330. A break below this could signal a deeper decline. On the upside, the 50-day EMA near 1.0750 remains a key resistance level for any potential rebound. If EUR/USD can break above this level, it could shift the bias toward a more bullish outlook.
Market Sentiment and Outlook
As the no-confidence vote in France and US economic data take center stage, EUR/USD is expected to remain volatile. The outcome of the French political situation will likely determine the short-term direction of the Euro, while US employment data and the Services PMI could influence market expectations for Fed policy. With the potential for further ECB rate cuts and a cautious Federal Reserve, the outlook for EUR/USD remains tilted to the downside, although any changes in the political or economic landscape could alter this trajectory. Investors will be watching closely for any developments that could offer fresh impetus for price action.
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