France and UK go to the polls; will elections bring chaos or order. US payrolls report for June awaited as Fed hawks don’t budge. Eurozone CPI, Fed minutes and ECB forum also on investors’ radar.
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Welcome to another episode of Global Market Insights, brought to you by XM.com, where we provide meaningful and informative content about the events that affect market trends and shape global markets. Heading into a crucial political week, how would the euro and pound respond to the election outcomes? This is the week ahead here at XM.com. Thanks for joining us. I'm Christina Madocos with me today to unpack this very busy week ahead as our lead investment analyst, Rafael Gyan. I'm Raffi, starting with a snap election in France on Sunday. Macron's gamble is set to backfire. So how will Monday look for the euro? Well, Christian, it certainly does look like Macron's gamble isn't going to pay off. So he was hoping, or at least what we think, he was hoping to achieve by calling a snap election, is that the mere threat of having a fire at government in France would kind of act as a bit of a wake-up goal to all the other parties and that perhaps they would all unite to basically keep the fire right out of power. But it looks like each party or each alliance is basically out to get as many votes as they can. So the National Rally Party has in fact been able to increase their lead and not just that, but the newly formed left-wiggle alliance has also managed to overtake Macron's assemble coalition. So as far as the markets are concerned, perhaps the bigger threat is in fact the left-week coalition because what we've been hearing from the National Rally, which is, of course, Marie Le Pen's party, that they've kind of toned down some of their more radical ideas. They've said that they're not going to do and do some of the reforms on pensions, for example. They're not going to try to abide by EU fiscal rules, so maybe less of a threat in terms of potential debt crisis like we saw from least-trust-minute budget in the UK a couple of years ago. But also now we've got the left-wing also doing rather well in the polls. And they're pledging to increase spending by €150 billion euros. So should they, if say the National Rally Party doesn't get a majority and the left-wing comes a close second, they might be in a position to form a government. Should they reach some kind of agreement with other smaller parties? But of course, they could also end up with some kind of a coalition that does include Macron's Assemble coalition. So this would probably be the best outcome for the markets, but it's unlikely. And so if we end up in a situation where the National Rally doesn't get an absolute majority and throw any other combination of coalitions or alliances might not last very long, because basically we're seeing fractures across the political spectrum in France. And so we could end up in some kind of political paralysis, because in France, the president can't call another election for at least another year after the last one. So if we end up in a situation where each new government ends up collapsing or even if we do have some kind of alliance that does hold together, they might struggle to pass much legislation. So there's a real concern for the markets, for the euro, because it doesn't just concern France, it also would have an impact on how well the EU is governed in terms of the lack of leadership with France being one of the key members of the European Union. Well apart from the election in France, the single currency will also have to digest the latest Eurozone CPI data out on Tuesday. What could the report mean for the euro and of course for speculation and further ECB rate cut bets? So this is another potential headache for the euro next week. So now of course, markets may not react, may decide not to react too much to the election results, because Sunday's election is only the first round, a lot could still change until the second round on the following Sunday. So I think the Eurozone inflation numbers will attract quite a bit of attention. Last time of course, we saw a stronger than expected pick up in Eurozone headline figure to 2.6, it may drop to 2.5% for June, but I guess just as important is the fact that we have a 3-day ECB forum, we're going to have a lot of central bankers attending, including Fed officials, including Chair Powell. And interestingly, Lagarde will be speaking later in the day after that Eurozone inflation numbers are out, so markets will be watching very closely as to whether or not she's going to signal further rate cuts for the Eurozone, whether she's going to be confident or she's going to signal explicitly about a September cut, whether or not she agrees with the market pricing of two additional cuts for later this year. Now Raffi, let's turn to the United Kingdom, Thursday's election will be crucial for the pound of course. How could the outcome affect sterling? So indeed, these elections have been long time coming, and it's looking a lot simpler, much more straightforward than what we're going to likely to get in France, because of course the opposition Labour Party are well ahead of the Conservatives, Rochi Sunak was hoping that calling the elections a little bit earlier than expected, I think most were expecting the elections to take place in the autumn. So Rochi Sunak, as soon as we got that inflation print of 2%, he thought he would capitalize on that and also hoping that by doing so he would catch the opposition the Labour Party a little bit off guard, but it doesn't look like it has made much of a difference, because the Tories are way behind the Conservatives and some polls even, way behind the Labour and some polls even suggest that they may be even behind the far right reform UK party, which of course is led by Nigel Farage. So the problem here is that whilst on the one hand, a strong majority of Labour would be good because it would bring some much in its stability to the UK political system, it might, if Labour end up getting a super majority, this might start to worry some investors because Labour have been a little bit sketchy when it comes to their tax and spending plans, they said they're not going to raise income tax or national insurance or VAT, but we might see some form of taxes on businesses, we might see some kind of tax on wealthy individuals. And we don't quite know how much they're going to end up spending because they are keen to improve, for example, the health of service, so a lot of question marks there. So I think the real test for Sterling will be not from the election outcome, but probably a few weeks or a few months down the line once they start to have a better idea of Labour's specific plans on the economy, and I think that's going to be the real test for Sterling in the, I think in the immediate aftermath, Sterling might actually gain a little bit, you know, once this whole, you know, once we know for certain that yes Labour will be the next government and the Conservatives are not likely to come into power again in the foreseeable future. And finally, Raphael, let's cross into the United States, the latest employment report is out on Friday, how could the NFP report affect the dollar? So jobs report, as always, will be closely watched. Now a head of that, we've got a number of other data, DICN, PMIs, these are always important as well, because they give us, you know, study more for looking than other indicators, we also have it includes the ICN, includes the Crisis Pay Index, which kind of shows us the underlying trending price pressures, and also the other job data on, for example, we've got challenger layoffs and jobs job openings, where, you know, we're at a stage right now where investors are really trying to read as much as possible on the economy, because it's not quite clear, is the economy starting to slow down, is it's, it's consumer spending still strong, we don't have quite strong enough idea, and Fed is in the same situation. So, I think we have to look at the overall picture, what we're going to get from all these data, Friday's jobs numbers will wrap things up, of course, and, you know, it's going to be interesting to see whether the jobs report is going to tilt the balance towards say a softening economy or a still resilient economy. Last month, we got a very strong print, and that did basically, you know, kind of give the dollar a little bit of a lift, but then, of course, when we had a look at the details, we saw that things weren't quite as strong as the headline numbers suggested. This time around, we're expecting a lower figure over around 180,000, but again, the unemployment rate, the wage growth, those are going to be just as crucial. And of course, we will be hearing from Powell on Tuesday, when he attends a panel discussion with President Lagarde of the ECB, and we're also going to get the Fed minutes on Wednesday as well. So, a lot of stuff for traders to basically keep an eye on, and I think it's basically the jobs report, the NFP report, that's going to wrap things up on Friday, and so a lot can change between the start of the week and until the end of the week for the dollar, for the time being, you know, it's been having pretty good solid months, so it is vulnerable to a bit of a selloff, should we see some softening in the US economy. Absolutely, Raffi is going to be an interesting week, not just for the dollar, of course. This was the week ahead, thanks for joining us at XM.com. [BLANK_AUDIO]
