Emmanuel Macron and Marine Le Pen won the first round of election. Is it a good time to short EUR/USD expecting the gap to close?
By Wayne Ko, Head of Research & Education at Fullerton Markets.
France held their first round of presidential election over the weekend. The end result could be the best of all the probable outcomes. This is reflected in the price gap of more than 180 pips when EUR/USD opens higher for the week. The celebration may be short-lived as market is likely to look forward to the second round of election on 7th May. On one corner representing the euro bull, its Emmanuel Macron the globalist and on the other corner representing the euro bear, its Marine Le Pen an anti-EU. The euro could swing in either direction depending on the final result. Uncertainties lead to “sell first think later” phenomenon, we prefer to go with the sell on rally approach. From now until 7th May, any fresh poll results showing a shift in support between Macron and Le Pen are likely to cause some short-term volatility in euro.
Theresa May Calls Snap Election
UK Prime Minister Theresa May surprised the market by calling for a snap election on 8th June and the parliament has given the approval. 2017 is truly the year of elections in Europe. She is clearly “frustrated” by the lack of support in the parliament and is looking for a mandate to lead UK into the negotiations with EU. Some called this a masterstroke of a politician to throw her rivals off guard in order to garner more support. Regardless of her motive, investors are buying it. GBP/USD rallied to 1.29, a 6-month high. We expect GBP/USD to continue to find support around 1.28, unless fresh poll shows May is losing her popularity.
What will BOJ* and ECB** do this week?
Both Japan and Europe are struggling to get their inflation back on track. BOJ Governor Kuroda mentioned in a speech last week the current bond purchases will continue. We do not expect Kuroda to make any changes in their upcoming official policy announcement. The prolonged easing is likely to put some pressure on the yen.
ECB President Mario Draghi is not about to scale back on easing either. Europe is having a tough time hitting their inflation target and it just make things more difficult in the year of elections. There are too much uncertainties looming and we expect ECB to maintain an accommodative policy in their upcoming policy meeting. The near term fate of the euro will depend on the French presidential election.
* Bank of Japan ** European Central Bank
GBP/USD – Slightly bullish. We expect this pair to find support around 1.2770. Consider going long around 1.2770.
EUR/JPY – Slightly bearish. Uncertainties are likely to dampen the euro strength. Consider going short if price breaks the support around 119.20.
XAG/USD (Silver) – Bearish. Silver is on a downtrend amidst optimism arising from UK snap election and dollar strength. Consider going short on rallies.
Top News This Week (GMT+8 time zone)
Canada: Core Retail Sales m/m. Wednesday 26th April, 8.30pm.
We expect figures to come in at 0.6% (previous figure was 1.7%).
Europe: Minimum Bid Rate. Thursday 27th April, 7.45pm.
We expect figures to remain unchanged at 0.0% (previous figure was 0.0%).
US: Advance GDP q/q. Friday 28th April, 8.30pm.
We expect figures to come in at 1.2% (previous figure was 2.1%).
Fullerton Markets Research Team
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