EUR/USD: US consumer price report is highly awaited

The foreign exchange market remains preoccupied with the all-out gamble by French Prime Minister Francois Bayrou ahead of the 8 September deadline and a vote of confidence in the National Assembly. Going so far as to denounce, in a televised interview on TF1, "the comfort of the boomers," the aging Pau native said he was ready to discuss "everything" except the substance of the issue, namely a 45 billion euro budgetary effort. Suffice it to say, the odds of a majority vote of confidence among MPs are elusive at this stage.

Among the scenarios the market is considering is a government resignation, followed by the appointment of a new Prime Minister of a different political stripe. Unless another dissolution of the National Assembly reshuffles the deck. A scenario whose probability is estimated at 64% by Wilfrid Galand, Director - Strategist at Montpensier Finance.

"Volatility could then be high, depending on the various polls and up until the elections (which must be held within a minimum of 20 days and a maximum of 40 days after the dissolution decree). It could affect all eurozone assets, including the single currency, with France still at the forefront. A surge in the 10-year OAT yield towards 4% is a risk."

At the time of writing, the French 10-year bond is above 3.50, compared to 3.42% for its Greek counterpart.

"In this context, the ECB's reaction would be highly anticipated," continues the asset manager. "The use of the eurozone's emergency stabilisation mechanisms remains a possibility that could quickly be on the table of the governors in Frankfurt, in close coordination with the European Union authorities. In an effort to preserve the integrity of the Monetary Union, the Frankfurt institution cannot remain inactive, and the pressure on Christine Lagarde will be significant."

On the macroeconomic agenda today, the key focus will be PCE (personal consumption expenditure) prices, the Fed's preferred inflation gauge. As a reminder, the Fed is very likely moving toward a 25-basis-point cut in the dollar's interest rate next month at the conclusion of its FOMC meeting. This FOMC meeting will be all the more closely watched since, at the Jackson Hole symposium, the head of the powerful monetary institution paved the way for a little more flexibility. In any case, the CME Group's FedWatch tool puts the probability of a 25-basis-point contraction in the Fed Funds rate at 88.1%.

These remarks "haven't changed [PIMCO's] basic outlook," which predicts "a gradual series of rate cuts - probably starting with a 25-bps cut in September - to bring the federal funds rate back to a neutral range (3% to 3.5%), probably before the end of Powell's term at the Fed chairmanship in May. In his speech, Powell cited growing downside risks to employment and the transitory nature of the tariffs' effects as reasons why policy "may" need adjusting - the clearest signal he could give of the Fed's intention to announce a 25-bps rate cut in September without prior commitment. However, he also emphasised that a return to neutrality would likely be gradual and dependent on inflationary pressures proving to be one-off."

Economists surveyed by the Wall Street Journal expect the index excluding food and energy prices to rise 3%.

This morning, traders saw inflation and growth figures from France that were relatively in line with expectations.

Right now, the pair is trading at $1.1663.

KEY CHARTS
The EUR/USD is in a marked upward trend, underlying, above a meaningful oblique line. We have represented this linear support level in black. In the immediate future, we will keep a close eye on the relative positioning of the 20-day (dark blue) and 50-day (orange) moving averages to optimise entry points.

MEDIUM-TERM FORECAST
In view of the key chart factors we have mentioned, our medium-term view on the EUR/USD is neutral.

We will maintain this neutral view as long as the EUR/USD pair is positioned between support at $1.1608 and resistance at $1.1970.