It's likely to be a big week for trading in the euro. The single currency has soared against the US dollar, but it remains to be seen if this is a one-day wonder or the start of a larger move upward.
Traders have responded strongly to the first round of French presidential voting, pricing in a Macron second round win, but have they priced in too much too soon? Whether the gap holds may tell the true tale. Euro pairs may remain active through the week, ahead of Thursday's ECB meeting.
EUR/USD gapped upward to start the week from $1.0730 toward $1.0815. The pair initially carried higher toward $1.0945 where it ran into Fibonacci resistance with its next test after that possible near the $1.1000 round number.
The pair has settled back toward the $1.0860 to $1.0900 area. A spinning top candle forming suggests that after the initial move, bulls and bears appear to be coming back into balance at this higher level. Whether this is a one-day event move or the start of a bigger uptrend remains to be seen. As long as this breakaway gap remains unfilled the new upleg continues but if support at $1.0815 fails, the gap could be filled back in with initial support near $1.0775 then $1.0730.
The RSI regained 50 last week and continues to climb indicating increasing upward momentum but it has only barely confirmed the new high so it's possible this rally could be tiring and a pause to digest recent gains possible.
The French election and the ECB meeting may impact trading in euro pairs in two ways: their influence on political risk and their influence on monetary policy.
France’s presidential election has been seen as a key test of whether the EU may be able to hold together or fall victim to the wave of populist and anti-EU/globalisation establishment forces that won key votes in the UK and US last year and have propelled support for the UK conservatives to 50% according to recent polls.
Although not representing a traditional party, Emmanuel Macron has been seen as a centrist candidate representing the forces of political stability, while Eurosceptic Marine Le Pen has promised to try and take France out of the eurozone, which could cause the euro project in its current form to collapse. A good result for Eurosceptics Le Pen and Melenchon may cause risk aversion, which could weigh on markets while Macron or Fillon could spark a move back into risk markets and potentially kick off a rally for stocks.
The big surge in the euro and stocks since the results were announced indicates that traders are expecting Macron to win, particularly with early second round polls giving him a 62%-38% lead and the establishment coming in behind him. Traders should be wary of getting too complacent about this, however. In the week before the Brexit vote, traders priced in a remain win only to get caught way offside when leave won. A closer vote may not be a ringing endorsement of the EU, with elections coming in Germany and Italy within a year, and could dampen enthusiasm.
The euro may also be active around Thursday’s ECB meeting. Some post-election chatter suggested that a vote for stability/Macron in France could encourage the ECB to change its dovish stance and accelerate its timetable for tapering and moving toward raising interest rates. It’s been clear for some time that the ECB’s taper this month was designed to push the tough decisions out past the coming elections. Hawkish talk from President Draghi this week could support recent gains, but dovish talk could spark a correction in euro pairs and possibly continental indices as well.
Heightened market volatility is likely over the election period, this could result in widened spreads. We recommend that you monitor positions carefully, consider the use of appropriate risk management tools and maintain a sufficient account surplus throughout this period.
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