Euro Spikes Then Stalls

24 April, 2017

Recent trade has presented a slug of volatility with some mixed outcomes for our prop desk. Short Yen positions have yielded results, but short equity index trades have once again frustrated with futures pointing to significantly higher starts. The S&P is currently being called up 25 at 2374.

The big event for markets to digest as they return from the weekend break will be the result of the first round of the French elections – and what this likely means for the run-off vote n two weeks time. Beyond this, economic data is relatively thin on the ground in the near term. The natural assumption would be that Macron’s appeal to the centre – and now by default the left – will assure him of the title, but the muted response from markets so far suggests the next two weeks will provide further volatility.

By the time Asian markets opened last night, the provisional results of the French election were well established and with a high voter turn out, it was perhaps no surprise that it was the two who had polled the best who went on to be declared winners. Arguably the risk markets had perceived in the run up was the run-off being contested between left and right, in turn splitting the vote far closer, but with centrist Macron now pitted against right wing candidate Le Pen, the result seems easier to call. EUR/USD opened above 1.09 – its highest level since the US Presidential election almost six months ago – but confidence has waivered since. European traders may be in a position to give the currency another boost as their day gets underway, but for now the gains do have the potential to look a little under-done.

We have the German Ifo business climate index due for release at 8am GMT and although any momentum here is likely to be overshadowed by the outcome of the French elections, any shortfall here could still serve to reign in upside for the common currency. As we have seen though the Asian session, the market isn’t quite ready to hand victory to Macron, yet.

There’s a French government auction of short term debt scheduled for 1pm GMT and this will again give a good idea of how markets see the run-off vote playing out. With these instruments currently trading with negative yields, the expectation would be that this pattern continues, but with the En Marche! Movement having no track record in politics, will we see a degree of caution creeping in over what may lie ahead here? A victory for Macron may well be the best outcome for keeping the European project alive, but can the campaign pledges be turned into reality – and in a cost effective manner?

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