25.02.202623:50 Forex Analysis & Reviews: The Euro Played Politics

While the euro ponders, the dollar acts. Investors are speculating whether Christine Lagarde will leave her position as head of the ECB on schedule or earlier. How will this affect EUR/USD? Meanwhile, "hawkish" comments from Fed officials have led to a significant shift in the outlook of the futures market. For the first time in a long time, derivatives indicate less than a 50% chance of a rate cut in the federal funds rate in June. This circumstance favors the American currency.

Dynamics of Anticipated Fed Monetary Expansion in June

For a long time, the U.S. dollar was under pressure, as it was believed that the new Fed Chair would push other officials to vote for a cut in the federal funds rate. However, after Donald Trump chose Kevin Warsh, the markets calmed somewhat. He was considered the least "dovish" of all candidates. However, he has not hidden his desire to ease monetary policy.

But the Fed is not a one-man show; its decisions are made collectively. The decline of EUR/USD is a result of the realization that simply resuming the cycle of monetary expansion is not within anyone's control. Moreover, investors believe that Kevin Warsh will maintain the Fed's independence, unlike his main competitor, Kevin Hassett.

The U.S. example is contagious. The ECB will also need a new leader. Rumors have spread in the market that if Christine Lagarde stays until the end of her term, her replacement will have to be chosen by the right in France. They insist that the central bank purchase troubled local bonds. To prevent this, she should resign early.

About 57% of Bloomberg experts believe this will happen. The main candidate is Klaas Knot if Lagarde steps down early. If not, it will likely be Pablo Hernandez de Cos, head of the Bank for International Settlements. Knot is seen as a "hawk," while Hernandez de Cos is more of a "dove."

Early Resignation as a Bullish Factor for the Euro

In this regard, Lagarde's early resignation would be a "bullish" factor for the euro. The decline of EUR/USD is driven by fears that the governments of France and Germany are making decisions for the ECB. This is akin to the Fed's diminished authority.

It is worth noting that the Prime Minister of Japan is also attempting to interfere in the central bank's affairs. At a meeting with BoJ head Kazuo Ueda, she expressed dissatisfaction with the normalization of monetary policy. As a result, the yen has weakened significantly against major global currencies.

Thus, it is not just macroeconomics that determines currency rates on the Forex market. Politics plays a role, too.

Technically, on the daily chart of EUR/USD, there is an ongoing struggle with the lower boundary of the fair-value range at 1.1785-1.194. If the "bears" celebrate victory, a fall of the main currency pair below 1.1765 would allow for increasing short positions. Conversely, if the "bulls" succeed, it would give grounds to consider buying euros against the U.S. dollar.