Euro Weakens Amid French Instability; Dollar Strengthens on U.S. Data

The euro weakened against a strengthening U.S. dollar on Monday amid political instability in France, where the far-right National Rally (RN) party signaled support for a potential no-confidence motion against the government. This heightened concerns about a possible government collapse, delaying efforts to address France's budget deficit and pushing the risk premium on French bonds to its highest level since the eurozone debt crisis. Meanwhile, robust U.S. manufacturing data bolstered the dollar, although Federal Reserve Governor Christopher Waller hinted at a possible rate cut later this month.

In the eurozone, inflation accelerated to 2.3% in November, exceeding the European Central Bank's (ECB) 2% target, driven by statistical base effects and persistent service price growth. Core inflation remained steady at 2.7%, sparking debates over the scale of the ECB's expected December rate cut. Lending growth to businesses and households improved, suggesting a potential "soft landing" for the eurozone economy. However, manufacturing activity contracted further, with the Purchasing Managers’ Index (PMI) sinking deeper into contraction territory. Germany and France reported significant declines, reflecting broader economic struggles in the region.

The European Central Bank (ECB) faces a delicate balancing act as it navigates monetary policy challenges amid disinflation progress, weak economic growth, and external trade risks. Key policymakers emphasize the need for forward-looking strategies, rate adjustments, and refined policy tools to stabilize inflation and foster growth sustainably.

Several ECB policymakers, including François Villeroy de Galhau and Olli Rehn, highlight the likelihood of additional rate cuts, with markets anticipating reductions at upcoming meetings. The deposit rate, currently at 3.25%, is expected to fall to around 1.75% by 2025. Policymakers debate whether to reach a "neutral" rate of 2-2.5%, which neither stimulates nor restricts growth, or to go lower if economic conditions remain weak.

Global trade uncertainties, particularly potential U.S. tariffs under the new administration, present risks to European growth. Policymakers warn that retaliatory measures could spark trade wars, harming the global economy and dampening eurozone recovery.

The 2025 eurozone outlook predicts modest growth of 0.9%, supported by disinflation-driven real wage gains but hampered by weak investment and trade uncertainties. Inflation is expected to remain below target at 1.6%, prompting ongoing monetary easing. Divergent national trajectories reveal deeper challenges, with Germany's rigid fiscal policies and France's political instability contrasting with Spain's stronger performance.

Germany’s economy remains stuck in a prolonged period of weakness, marked by stagnant growth and structural challenges, according to Bundesbank President Joachim Nagel. The nation's oversized industrial sector is in recession, export demand is weak, and consumers are cautious, opting to save rather than spend. Nagel warned against rapid interest rate cuts by the European Central Bank (ECB), citing persistent inflation risks like wage growth and trade policies. While inflation in Germany is rising modestly, it remains higher than expected in certain regions, with core inflation stubbornly elevated.

France, in contrast, saw modest economic growth in the third quarter of 2024, partly boosted by the Paris Olympics. However, its manufacturing sector is also facing significant challenges, with a sharp decline in new orders and weakening consumer confidence amid economic uncertainties.

The U.S. dollar remains dominant in global finance and trade despite signs of overvaluation and rising de-dollarization efforts, as UBS warned. The dollar accounts for over 47% of global payments and features in 88% of currency trades, underscoring its unmatched liquidity. However, the greenback's recent surge is partially fueled by President-elect Donald Trump's policy stance, including his call for BRICS nations to avoid adopting alternative currencies—a move criticized by the Kremlin.

Meanwhile, U.S. manufacturing showed moderate improvement in November. Orders grew for the first time in eight months, input prices dropped significantly, and the Institute for Supply Management (ISM) manufacturing PMI rose to 48.4 from October's 46.5. Despite this progress, challenges persist, with production slowing and weak demand continuing to hinder backlogs.

In monetary policy, Fed Governor Christopher Waller stated that while further rate cuts are likely, the current restrictive stance allows flexibility in adjusting the pace of easing if necessary. Markets reacted by increasing the probability of a 25-basis-point cut in December to 79%. This week's November payrolls report, with a projected job gain of 195,000 and a slight uptick in unemployment to 4.2%, will significantly influence future rate decisions.

Data for Technical Analysis (1H) CFD EUR/USD

Resistance : 1.0495, 1.0498, 1.0503

Support : 1.0485, 1.0482, 1.0477

1H Outlook    

Source: TradingView 

Buy/Long 1 If the support at the price range 1.0475 - 1.0485 is touched, but the support at 1.0485 cannot be broken, the TP may be set around 1.0496 and the SL around 1.0470, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.0495 - 1.0505, TP may be set around 1.0514 and SL around 1.0480, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.0495 - 1.0505 is touched, but the resistance at 1.0495 cannot be broken, the TP may be set around 1.0483 and the SL around 1.0510, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.0475 - 1.0485, TP may be set around 1.0462 and SL around 1.0500, or up to the risk appetite.       

Pivot Points Dec 3, 2024 02:40AM GMT