Dollar Gets More Advantage

The U.S. Dollar index (DXY) is marginally up by 0.1% to 105.98, while the EURUSD is down by 0.1% to 1.07230. Despite the apparent market tranquility, significant turbulence looms beneath the surface. The May PCE Index in the United States, indicating a continuous slowdown, was largely ignored by investors. Instead, the market's focus has shifted to political developments.

Last Friday, U.S. 10-year Treasury yields surged to 4.40%, a move driven by chaos within the Democratic party. The yet unofficial nominee, Joe Biden, faced a significant setback after losing the first debate to Donald Trump. Many Democrats are pushing for a more capable replacement, but Biden's family and the Democratic majority continue to support him, making his step down unlikely. Trump's increasing chances of winning the presidential race have further unsettled the market.

Adding to the tension, the U.S. Supreme Court ruled that Trump has partial immunity from criminal prosecution, pushing 10-year Treasury yields up to 4.49% on Monday. Investors fear that a Trump presidency could lead to the reintroduction of more trade tariffs, exacerbating inflation and making Federal Reserve interest rate cuts unlikely in the foreseeable future. Consequently, as Trump's victory prospects improve, so do the yields, strengthening the Dollar despite weak July PMI data and positive parliamentary election results in France.

In France, the far-right National Rally party led by Marine Le Pen won the first round of parliamentary elections with 33.15%, although this was below expectations. The left-wing New Popular Front (NFP) coalition came second with 27.99%, and President Emmanuel Macron’s Ensemble alliance came third with 20.76%. The NFP and Macron's party are forming an alliance to challenge National Rally in the second round on July 7. Le Pen has stated that her party will only lead the government if they achieve an absolute majority, which is now in doubt. The EURUSD rose to 1.07760 following these developments.

Investors are also keenly awaiting speeches from European Central Bank President Christine Lagarde and Federal Reserve Chair Jerome Powell at the European Central Bank’s conference in Sintra, Portugal. The key question is how recent political developments will impact central bank policies.

Additionally, attention will be on the services PMIs in the Eurozone, the U.K., and the U.S., as well as the ADP Nonfarm Payrolls and FOMC Minutes on Wednesday. Following a brief pause for Independence Day in the United States, the June labor market report will be released on Friday.

The market is also poised for the second round of parliamentary elections in France on July 7, which could trigger a significant reaction next Monday.