Euro insoumis

There are rare moments when the market’s reaction to news leaves me baffled. And today – this week – is one of them. The French government just collapsed, and the composition of the government suggests that whoever replaces Micel Barnier will face the same problems than he did, in a France that became ungovernable. But who cares? The EURUSD was around 1.0510 when the news broke yesterday night, and is trading around 1.0526 now. The total absence of reaction from the euro hints that we won’t see a bloodshed in stock and bond markets, either. The message is clear: chaos feels better than the stability that was proposed to France.

What now? The uncertainty will grow and the pressure on Macron to quit will mount. But investors will move on with their lives, and look elsewhere, to the European Central Bank (ECB), to decide what to do next with their positioning. The ECB Chief Lagarde said yesterday that their battle against inflation ‘is nearing completion’ but not ‘mission accomplished’ yet. The services inflation remains sticky – near 3.9% in November – the headline inflation ticked above the 2% target, gas prices have been rising, and US is threatening Europe with tariffs. In the jungle of unknowns, the most cautious option for the ECB is a 25bp cut – and not a 50bo cut. The scaling back of the dovish ECB expectations and the resilience to the French chaos strengthen support near the 1.05 level and should allow a further rebound. The key resistance to the September-November selloff stands at 1.0672, the major 38.2% Fibonacci retracement. Until there, the euro’s recovery will not raise major questions regarding the medium term trend.

Of course, the dollar leg of the EURUSD trade is as - if not more - powerful than the euro leg. And sentiment among the dollar bulls is weakening despite the Federal Reserve (Fed) members’ cautious communication. The Fed Chair Powell couldn’t help but admit that the US economy is in a remarkably good shape and that the downside risks from the labour market have decreased. But his words did little to convince the Fed doves to dial back their 25bp cut expectations for December. The US 2-year yield – which best captures the Fed expectations – fell to 4.11% as the services PMI and ADP numbers came in lower than expected. Up next: Friday’s official jobs data – which will hardly derail the dovish Fed expectations. A potentially strong NFP number will be disregarded due to the hurricane disruptions of the month before. If that’s the case, the US dollar should lose some more field and let the majors recover.

The USDJPY continues to go up and down around the 150 mark, but the yen bulls lack conviction that the Bank of Japan (BoJ) rate hike would lead to a significant appreciation of the yen when the carry traders gently come back to the market to benefit from the comfortable rate differential – December hike or not.

In energy, US crude fell 1.80% yesterday after failure to clear the $70pb resistance. Even the 5.1 mio barrel weekly drop in US crude inventories couldn’t bring the buyers in. OPEC will announce its verdict about the production restrictions in a few hours and they have a tough job. First, they must announce more than a 3-month delay to attract the bulls’ attention. And even then, the bears are waiting in ambush to sell the slightest tops into and above the $70pb level on ample supply/weak demand outlook.

Away from these problems, the S&P500 just printed its 56th record high this year and Nasdaq 100 jumped to a fresh ATH. Amazon advanced to a fresh record as news that Amazon is building a supercomputer powered by hundreds of thousands of its own Trainium chips to train Anthropic AI models wet investors’ appetite. The move could help Amazon cut reliance on pricey Nvidia chips and do the same for its Big Tech buddies. The rumour has it, Apple is on board as a customer. Do Nvidia investors worry about it? Not for now. The shares jumped 3.5% yesterday to past $145 per share. But it’s worth keeping an eye on this space because the Big Tech stood for half – yes half – of Nvidia’s revenue last quarter and their ambition to build their own chips is one of the major risks to Nvidia’s revenue growth.