Euro Holds Steady as French Political Uncertainty Persists

US Dollar (USD)
The US dollar remains rangebound as investors await this week’s crucial inflation figures. Wednesday’s Producer Price Index (PPI) and Thursday’s Consumer Price Index (CPI) are unlikely to cause major shifts individually, but they will be pivotal in shaping the Federal Reserve’s stance at its upcoming policy meeting. Markets have already priced in interest rate cuts, meaning only a sharp surprise in the data would move the needle significantly.

A recent downward revision to Non-Farm Payrolls highlights a softer labour market, though this was widely anticipated. Focus has now turned to how tariffs could impact consumer prices. If inflation pressures remain subdued, speculation of a larger 50-basis-point Fed cut could resurface, potentially pushing the dollar lower. For now, the Dollar Index continues to hover just above the 97.500 level, showing resilience despite recent weakness.

Pound Sterling (GBP)
Sterling has started the week on a cautious note, with risks skewed to the downside. Last week’s sharp sell-off in UK government bonds continues to weigh on sentiment, keeping GBP/EUR under pressure. The exchange rate remains capped beneath its nine-day moving average, signalling ongoing weakness. Technical charts point to 1.1481—the low from last Tuesday—as the next support level to monitor.

Domestically, Friday’s UK GDP figures are unlikely to provide much relief, with forecasts suggesting flat growth in July. The Bank of England faces a policy dilemma: softer labour market signals argue for further monetary easing, while sticky inflation urges caution. Governor Andrew Bailey’s recent testimony in Parliament underlined the likelihood that rate cuts may not arrive as swiftly as markets expect. This divergence has offered some support to UK yields, but sterling’s broader outlook remains fragile.

Euro (EUR)
The euro has held firm despite political upheaval in France. President Emmanuel Macron now faces the challenge of appointing his fifth prime minister in less than two years following the collapse of François Bayrou’s administration. Investors, however, appear largely unshaken, with EUR/USD climbing to a one-month high—helped more by US dollar softness than enthusiasm for the euro itself.

France’s fiscal backdrop is far less reassuring. The budget deficit is forecast to reach 6.1% of GDP next year, well above EU limits, while debt is projected to rise towards 125% of GDP by 2029. Germany, meanwhile, is showing its own cracks, with sluggish growth and rising unemployment. With both of the eurozone’s largest economies under strain, confidence in the bloc’s stability remains tentative. While markets currently price in only a slim chance of further ECB rate cuts this year, any failure in France’s coalition-building process could widen bond spreads and revive concerns over eurozone cohesion.

Looking Ahead
The week ahead brings a series of market-moving events: US inflation releases, the ECB’s policy decision, and the UK’s GDP report. The dollar’s trajectory will depend on whether US inflation trends justify a more aggressive pace of Fed easing. In Britain, lacklustre growth figures are expected to keep sterling under pressure. In Europe, politics may yet re-emerge as a driver of volatility. For now, market sentiment is largely shaped by US weakness—supporting EUR/USD, leaving GBP/EUR subdued, and keeping dollar direction firmly tied to the Fed’s next steps.

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