The power of the dollar and the euro vulnerable to the result of the elections in France

The market is more and more likely to be pricing in the possibility of a quick monetary tightening by the US Federal Reserve. There is talk of a rate of increase in interest rates unprecedented in the US since 1994.

The contracts on the federal funds rate seem to indicate that interest rates in the US may rise by as much as 2,25 percentage points by the end of the year, but after the March hike by 0,25 percentage points. This would mean that the level of 2,5 percent. may be reached in 2022. This, in turn, could potentially affect the performance of the US dollar.

Fed officials' comments strengthen the USD

Indeed, the USD index is rising above 99,8 points on Friday, reaching the highest level in almost two years and approaching 100 points. This week the scale of growth is 1,3 percent. And if it sticks to the weekend, we will be dealing with the biggest weekly increase in a month. This could have been influenced by comments from several Fed officials, who called for faster interest rate hikes to curb rising inflation.

The latest Federal Reserve protocol also shows that many Fed officials are ready to raise interest rates every 50 basis points in the coming months, as well as begin reducing the massive central bank balance sheet from May. Moreover, the war and increasing sanctions against Russia for attacking Ukraine may have increased the demand for the dollar as a safe haven.

Will the euro exchange rate tremble after the elections in France?

After the strengthening of the US dollar, the exchange rate of the main currency pair EUR / USD dropped to 1,0850, which is the lowest level in a month. However, not only this may affect such a relatively low valuation of the euro. There may also be a political risk factor regarding the presidential elections in France. If there was a change of power and the assumption of office by the Eurosceptic Marine Le Pen, the potential EUR / USD target could be the 1,00 level.

In 2017, such political risk could also be included in the EUR / USD exchange rate. However, when it turned out after the weekend that Emmanuel Macron will become president, there is an increasing gap of approx. 200 pips, and the EUR / USD exchange rate started to systematically increase. From this perspective, it is worth remembering about the possibility of higher volatility also after the coming weekend.