Euro-to-Dollar Week Ahead: French Politics Shifts the Forecast

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The euro drops two-thirds of a per cent against the dollar on Monday.

The drop takes the euro to dollar exchange rate to 1.1654, which puts it on the cusp of a notable support zone at 1.1650 and turns the near-term outlook decidedly more bearish.

The euro is recording losses against all G10 peers - apart from the yen, which is also being driven by politics on Monday - and speaks of euro-specific concerns.

Step up France, which has once again witnessed the departure of another Prime Minister.

Sebastien Lecornu - like us, you probably hadn't familiarised yourself with his name yet - tendered his resignation on Monday after it became blazingly clear the government he was to head wouldn't get out of the gates.

President Emmanuel Macron announced a new cabinet on Sunday night, and the resounding political response made it clear it would not command the numbers in the National Assembly required to render it functional. This is because the new cabinet of ministers was very similar to the previous lot.

France is left rudderless, which is a problem on two fronts 1) the political uncertainty will weigh heavily on the government's attempts to get France's debt trajectory back onto a sustainable footing 2) political uncertainty weighs on businesses and households, which slows the economy and makes the ability to finance debt all the harder.

The dollar is proving the leading beneficiary of the euro selloff, and euro-dollar breaks below the 21-day moving average (at 1.1723) in the process.

This turns the near-term outlook bearish and our Week Ahead Forecast looks for a move sub-1.1650, with the big round support level at 1.16 coming into play over the coming days.

Take note too that the USD is also the primary beneficiary of a JPY selloff, linked to Sanae Takaichi's surprise win in the LDP leadership contest.

"The initial market reaction reflects expectations that Sanae Takaichi will actively pursue looser fiscal and monetary policies to support economic growth in Japan," says Lee Hardman, FX analyst at MUFG Bank Ltd. "The Japanese rate market has responded accordingly to pare back expectations for further BoJ rate hikes at the short-end of the curve."

The Dollar-Yen surges through 150, and with it lifts all other USD-paired boats in the harbour, including euro-dollar.

A politically-charged morning for global FX is therefore playing well for USD.

That being said, we cannot ignore U.S. politics, where a partial government shutdown continues with little signs today's scheduled votes to get a spending bill through the senate will succeed.

For now the dollar rides the shutdown with relative ease; indeed, the robust trade will surprise many.

However, there remains a consensus amongst economists that the longer the shutdown extends the worse it gets for the dollar.

This is because the economy will inevitably slow, and job losses will increase. It raises the prospect for faster and deeper cuts at the Federal Reserve, which is a classic headwind to USD.

Euro-dollar weakness could be shallow as a result and we wouldn't count this as the end of the longer-term uptrend, but a good opportunity for dollar sellers to get involved.