Sentiment in Europe remained pessimistic for the second consecutive day. Concerns about the continent's political future were underscored by the EUR/GBP reaching its lowest level since August 2022, alongside a sharp decline in French bonds and stocks. The yield on the benchmark 10-year French bonds increased by another 10 basis points as bond prices fell for the fourth straight day.
EUR/GBP breaks down
Given the breakdown in the EUR/GBP below key support around the pivotal 0.85 area, I will be monitoring for a potential ret-test of this area from underneath in the days ahead, before the trend potentially resumes.
Specifically, the area between 0.8480 to 0.8500 is now the most important resistance zone to watch for a potential trade.
Why are traders so concerned about EU’s political situation?
Investors are hesitant to buy into the latest dip due to the uncertainty surrounding the potential coalition government that could be led by President Macron and far-right Prime Minister Jordan Bardella. Additionally, the European Commission is expected to place France in an Excessive Deficit Procedure next week, raising concerns about France's fiscal sustainability and adherence to EU fiscal rules, adding further risk to the markets.
While European politics and their economic impact evolve gradually, the European elections suggest a future focus on border security and industrial policies, potentially shifting EU cooperation towards more domestic agendas. So far, sovereign debt tensions have been mostly confined to France, but today, we've seen minor turmoil spreading to a few southern European countries.
A rightward shift across Europe could heighten market uncertainty, making Europe less predictable and attractive to investors. It is crucial for European and national leaders to address these concerns promptly.
Written by Fawad Razaqzada, market analyst at FOREX.com Follow me on twitter: https://x.com/Trader_F_R
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