The Euro (EUR) is struggling to gain support from any positive sentiment stemming from the recent decline in oil prices, as it continues to fall against the US Dollar (USD) on Tuesday, reaching new seven-week lows under 1.1450. Political instability in Germany, particularly following the loss of Chancellor Friedrich Merz’s CDU in the recent state elections, has further weakened the common currency.
Merz has pledged to stay in office until his cabinet’s planned economic reforms are put in place. However, the significant defeat in Mecklenburg-Vorpommern, where the CDU failed to secure the 5% required to enter parliament for the first time since World War II, raises doubts about his leadership stability.
Moreover, Merz’s diminished influence casts a shadow over confidence in the Eurozone’s EUR 2 trillion budget plan, which is crucial for bolstering the bloc’s defense initiatives, especially if the pro-Kremlin Allianz fur Deutschland (AfD) gains more power in parliament. According to a report from the Financial Times, sources within the German government indicate that the elections have compelled the EU to reevaluate its upcoming objectives.
Concerns about France’s debt add pressure on the Euro
In addition, a small rating agency has downgraded France’s government debt, marking the highest level of debt since 1978, in the wake of turmoil in the bond market. This has sparked concerns about potential further downgrades since the likelihood of substantial fiscal tightening appears low, and this has added to the pressure on the Euro.
Today’s significant event will be a speech by European Central Bank (ECB) president Christine Lagarde, scheduled for later in the day at a conference hosted by the central banks of Ukraine and Poland. The ECB has raised its benchmark interest rate for the second time this year and signaled the possibility of further increases if inflation remains a concern. Lagarde is expected to reinforce this stance during her appearance.
On the flip side, the US Dollar appears to be gaining strength, attributed to the current rise in US yields. Analysts from MUFG/BTMU have noted that the 2-year US Treasury bond yield has surged by approximately 55 basis points since last month, as market participants come to terms with a potentially prolonged cycle of rate hikes by the Fed. They anticipate the Fed may implement three more hikes over the next year, a view supported by recent hawkish comments from regional Fed officials, even though they won’t be voting members this year.
