Weekly FX Chartbook: Politics Still the Key Theme in Markets

Key points:

• USD: European political uncertainty could underpin the US dollar, but economic cracks are widening supporting the case for rate cuts
• EUR: High volatility as election jitters continue
• JPY: Intervention criteria has not been met
• GBP: Relatively calm going into the elections
• AUD: RBA minutes likely to skew hawkish

French Elections: Round One Impact Could be Erased

The first round of elections in France has come to an end, and Marine Le Pen’s far-right party dominated with about 34% of the vote, although an absolutely majority was not seen. The left-wing coalition is set to get about 29% while Macron-centrist alliance is just clawing over 20% of the votes.

Markets were relieved that the victory for Le Pen’s far-right party was not as decisive, and some of the risk premium attached to Eurozone assets over the last few weeks was erased. EuroStoxx futures jumped higher and EURUSD rose back to 1.0750, while bond futures indicated that French-German spread could tighten.

However, political risks are not completely out of the radar. President Emmanuel Macron called for a "broad" alliance against the far-right in the second round, which will see run-off votes where there was no outright winner in the first round. Intense horse-trading will take the focus over the next week, and any signs of progress on Macron’s coalition could bolster the relief rally in Eurozone assets. Still, volatility is likely with electoral calculus likely to remain complicated and any recovery will likely be fragile this week before the second round of elections takes place on July 7.

While political uncertainty poses risks, it can also offer strategic entry points for long-term investors. To read more, go to our previous article on France Election Turmoil: European Equities Amidst the Upheaval.

US NFP Preview: Mixed Signals Won’t Rule Out Labour Market Loosening

The official US labour market figure on employment is published on Friday with estimates looking for a monthly change in June of 190k compared to 272k in May which was a significant upside surprise.

Monthly NFP data has remained prone to substantial downward revisions, and elsewhere, data is showing cracks are beginning to form in the US labor market. JOLTS job openings due on Tuesday will shed further light on that narrative and jobless claims on Friday are also key.

Even with headline NFP job gains at 190k, that would be a slowdown from the last 3-month average of ~250k. Fed will also be focusing on the wage growth, which needs to slow to make disinflation trends more sustainable, and the unemployment rate which is up at 4%. Any dovish surprise will prompt markets to bring up the odds of a September Fed rate cut, proving to be potentially positive for risk assets (or equities) and negative for the US dollar.