The Euro Is Trapped Between Devilish Fed and Raging Political Seas

The euro faces the kind of suddenly worsening political backdrop that would typically have investors dumping the currency. But the picture is clouded by an increasingly hard-to-read outlook for global interest rates. So far, the net result leaves the common currency slightly lower in the past week, though in line with both its six-month and one-year averages to the dollar. With the euro trapped between lower Treasury yields after weaker-than-expected May US inflation reports and the repercussions of gains by far-right parties in European Union elections, traders would be advised to bet for or against it using foreign exchange pairs other than the greenback.

The EU parliamentary vote results took on a new dimension last week after French President Emmanuel Macron called a snap election. The prospect of a far-right prime minister, whose commitment to the euro project might be less than total, prompted investors to dump French assets. Frexit is suddenly a non-negligible concern and financial markets eschew political volatility. The German ruling coalition suffered a similar drubbing with opposition right-wing parties performing better. The only clear governing party winner was Italian Prime Minister Giorgia Meloni’s right-wing Brothers of Italy.