As we enter the second half of the year, several events could significantly impact the political landscape in Europe and America. First, the UK election results were as expected, with the Labour Party securing a landslide victory, returning to power after 14 years, and its leader, Keir Starmer, becoming Prime Minister. In France, although the far-right led in the first round of parliamentary elections, the left-wing alliance and President Marcon’s centrist party managed to coordinate votes, ultimately pushing the far-right alliance to third place in the second round. However, no single party secured enough seats, leading to a hung parliament. Macron will decide on the Prime Minister only after the Paris Olympics. Unexpectedly, U.S. President Jow Biden, following a disastrous performance in the first televised debate, announced his withdrawal from the race on July 20. Vice President Kamala Harris is now likely to run, pending approval at the Democratic National Convention in August.

In July, the financial markets were also affected by a shift in the Federal Reserve’s monetary policy stance. Due to a slowing economy and declining inflation, Fed officials have started hinting at early rate cuts. The market currently expects two rate cuts this year, in September and December. As the Fed’s rate-cutting process becomes clearer, the U.S. Dollar Index fell steadily from around 105.80 at the beginning of July to 103.40 before rebounding. However, other economies also face the need for rate cuts, suggesting that the Dollar Index will find support at 102.50/103.00 and resistance at 104.50/105.00. Increased expectations of a U.S recession could also influence the dollar’s movement.

Taking advantage of the dollar’s decline and the Bank of Japan’s (BOJ) unexpected intervention in early July, the USD/JPY pair dropped from nearly 162 to 152, aligning with the BOJ’s intervention low in early May. Recently, a statement from a senior official of Japan’s ruling Liberal Democratic Party suggested that the BOJ should clearly express its determination to normalize monetary policy. Many voices also point out that the negative impact of a weak yen on daily life is growing, contributing to a decline in support for Prime Minister Fumio Kishida. The market expects the BOJ might raise interest again and announce a reduction in bond purchases at next week’s meeting, coinciding with the Fed’s clearer path to lowering rates. If the BOJ’s stance is firm enough and the USD breaks below 152, it might test 147. Consider shorting USD/JPY, with resistance at 154.50/155.00.

Patrick Law

Chief Operating Officer of Hantec Group