EUR/USD edges higher as French political crisis keeps downside sentiment afloat

• EUR/USD sustains above 1.0500 as the French political crisis keeps the pair on tenterhooks.
• The ECB is expected to cut its Deposit Facility Rate by 25 bps to 3% next week.
• Investors await the US NFP data for fresh interest-rate guidance.

EUR/USD ticks higher and strives to stay above 1.0500 in European trading hours on Thursday. The major currency pair gains slightly as investors attempt to move forward from the already anticipated collapse of a mere three-month-long Michel Barnier’s government after losing a no-confidence vote proposed by the Far Right and Left-wing coalition.

The demolition of the French government has put the economy into a much deeper crisis by limiting its capacity to tame the burgeoning fiscal deficit. Far-right and left-wing lawmakers backed a no-confidence motion against Barnier after claiming the budget from his government was “flawed and harmful” to French people. The budget in question proposed €60 billion in tax increases and spending cuts aimed at addressing France’s ballooning deficit, according to Firstpost.

Before the no-confidence vote, Barnier appealed to lawmakers, "This reality will not disappear by the magic of a motion of censure." He added the budget deficit would come back to haunt whichever government comes next.

French political turmoil has complicated the road ahead for the already-troubled Eurozone, which is facing severe downside risks to economic growth due to weak demand and potential tariffs once the new US administration of President-elect Donald Trump takes office. Meanwhile, monthly German Factory Orders declined in October but at a slower-than-expected pace. The economic data contracted by 1.5% after rising 7.2% in September. Economists expected the Factory Orders data to have declined by 2%.

European Central Bank (ECB) President Christine Lagarde also warned about growing risks to the trading bloc in her testimony before the Parliamentary Committee on Wednesday. “The medium-term economic outlook is uncertain, however, and dominated by downside risks," Lagarde said. "Geopolitical risks are elevated, with growing threats to international trade," she added.

On the interest rate outlook, Lagarde sticked to her data-dependent approach. However, traders expect that the ECB will cut its Deposit Facility Rate by 25 basis points (bps) to 3% at its December 12 meeting.

Daily digest market movers: EUR/USD rises slightly at US Dollar’s expense

• EUR/USD gains higher at the US Dollar’s (USD) expense. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls slightly but holds the immediate support of 106.00. The Greenback trades with caution ahead of the United States (US) Nonfarm Payrolls (NFP) data for November, which will be released on Friday.
• Economists expect the US economy to have added 200K fresh workers, significantly higher than the increase of 12K seen in October. The NFP report stated that payroll employment estimates in some industries were affected by the hurricanes last month. The Unemployment Rate is estimated to have increased to 4.2% from the former release of 4.1%. Investors will also pay close attention to the US Average Hourly Earnings data to get cues about the current status of wage growth.
• The official employment data will influence market expectations for the Federal Reserve (Fed) interest rate path. Meanwhile, Fed Chair Jerome Powell has supported a more gradual interest rate cut pace on the back of improved labor demand, increasing economic growth, and a slight acceleration in price pressures. “The US economy is in remarkably good shape, and there is no reason it can't continue,” and " the good news is that we can afford to be a little more cautious as we try to find neutral,” Powell said at the New York Times DealBook Summit on Wednesday.
• For the December meeting, there is a 77% chance that the Fed will reduce interest rates by 25 bps to 4.25%-4.50%, while the rest expect the Fed to leave them unchanged, according to the CME FedWatch tool.

Technical Analysis: EUR/USD consolidates near 1.0500

EUR/USD continues to wobble around the psychological figure of 1.0500. However, the outlook of the major currency pair remains bearish as all short-to-long-term day EMAs are declining, pointing to a downside trend.

The 14-day Relative Strength Index (RSI) rebounded after conditions turned oversold and climbed above 40.00, suggesting that the bearish momentum has faded. However, the bearish trend has not been extinguished.

Looking down, the November 22 low of 1.0330 will be a key support for Euro bulls. On the flip side, the 50-day EMA near 1.0750 will be the key barrier for the Euro bulls.