Human naivety and ingenuity can work wonders — including in financial markets. When leaders of French political parties publicly urge the European Central Bank and the national regulator to cut interest rates, unsophisticated voters might perceive this as a display of political wisdom. In reality, however, such statements represent sheer absurdity that exerts noticeable downward pressure on the EURUSD pair. Earlier this year, the US dollar showed weakness every time Donald Trump allowed himself to threaten Jerome Powell. Today, a similar scenario is unfolding around the euro.
Central Banks Are Not Tools for Solving Government Problems
The fundamental task of regulators does not consist of saving governments from their own mistakes. However, sometimes the problems of the executive branch acquire such a massive scale that politicians begin to openly demand monetary easing from monetary authorities. Donald Trump resorted to this tactic repeatedly. In October, Marine Le Pen — the leading favorite in the French presidential race — took up the baton. Her proposals for radically reducing the budget deficit and lowering the cost of sovereign debt servicing look so extreme that they are scaring market participants.
The situation is exacerbated by Jean-Luc Mélenchon — the main rival of the National Rally leader. He has openly promised to initiate political persecution of the Governor of the Bank of France, Emmanuel Moulin, in the event of his rise to power.
The Threat of a Eurozone Breakup Is Far More Serious Than Pressure on the Fed
Naturally, French politicians have significantly less influence over the ECB than the White House has over the Federal Reserve. But they have their own trump card: no one can guarantee that France will not leave the eurozone. And such a scenario carries incomparably more devastating consequences for the single European currency than any threats to the independence of the Fed for the US dollar.
It is quite natural that investors are hastily fleeing French assets. And this is not just about the bond market. The noticeable divergence in the dynamics of stock markets serves as a clear confirmation of capital outflow and acts as one of the key factors driving down the EURUSD exchange rate.
The Dollar Remains in Favor
Rabobank analysts note: as long as the US economy demonstrates sustainable growth and the market prices in further Fed rate hikes, the American currency will enjoy stable demand. In this context, even the release of the September FOMC meeting minutes failed to shake the confidence of EURUSD bears. Most committee members agreed that a hike in the federal funds rate will likely be appropriate before the end of the current year. The probability of an increase in borrowing costs in October remained virtually unchanged, while the chances of policy tightening in December increased slightly.
The US dollar’s positions continue to strengthen thanks to the phenomenon of American exceptionalism and a more aggressive cycle of monetary tightening by the Fed compared to other global central banks. Meanwhile, the euro is experiencing double pressure: on the one hand, capital is leaving the region due to France’s fiscal problems; on the other, politicians’ attempts to interfere with the ECB’s operations are undermining trust in the single European currency as a whole.
