MACRON’S CALL FOR ELECTION CAUSES EURO TO SLUMP – The euro serves as the official currency for 20 members of the European Union

The euro, serving as the official currency for 20 members of the European Union, has seen a sharp decline since Friday as uncertainties arise following Macron calling a snap election in response to a surge in support for the far-right Rassemblement National in France. Elsewhere in Europe the far-right parties gained support, although Ursula von der Leyen’s European People’s Party gained seats and remains the strongest party. 

The uncertainty in France adds one more element to what will be a busy week for markets with U.S. inflation data due on Wednesday, the same day as the Federal Reserve’s policy decision at its two-day meeting, and a Bank of Japan meeting on Friday rounding off the week.

The European Central Bank delivered the first rate cut since 2019 last week, marking the end of the current rate hike cycle. Despite a hawkish stance at the policy meeting, rising political uncertainties may pressure the ECB to be more accommodative in the monetary policy in supporting the region’s economy. This could further divert the policy stance of the central bank from that of its Western peers, especially the Federal Reserve (Fed). The Fed is poised to decide on its interest rate on Thursday, with no expectations for a policy shift. 

The euro zone’s economy stagnated in the second half of 2023, and the continuing political landscape may further cloud the outlook. In contrast to the euro area, the United States economy is much stronger and more stable, which may incentivise investors to sell the euro and buy the US dollar as a safe haven.