The euro opened with a large positive gap against its major peers on Monday, following the outcome of the first round of the French presidential election. The two candidates that qualified for the second round are Emmanuel Macron and Marine Le Pen, with their percentages being roughly 24% and 21.5% respectively. The run-off is scheduled on the 7th of May.
The positive reaction in the euro may have been fueled by the fact that in practically every poll for the second round, Macron is leading the Eurosceptic Le Pen by a significant margin. This implies that market participants may have already begun pricing in a Le Pen loss in the run-off and therefore, a lower probability of any ‘Frexit’ referendum.
EUR/USD gapped up, to open above the key resistance (now turned into support) territory of 1.0800 (S1) and the longer-term downtrend line drawn from the peak of the 3rd of May 2016. Nevertheless, the rate hit 1.0910 (R2) and then retreated to challenge the aforementioned territory as a support this time.
If the pair manages to close the day above that crossroad, we would consider the outlook to have turned positive. The bulls may regain control at some point soon and if they prove strong enough to overcome the 1.0870 (R1) level again, they could aim for another test near 1.0910 (R2).
The euro was not the only asset that responded to the result. Risk appetite dominated the financial community, as European stock indices opened with notable positive gaps, and safe-havens like JPY and gold, started the week on the back foot. We think that this improved sentiment may also spill over to US equity markets, which could open in a similar fashion as their EU counterparts.
EUR/JPY opened with a large positive gap as well, hitting 120.55 (R2) before pulling back. The gap brought the rate above the short-term downtrend line taken from the high of the 13th of March, something that signals a near-term trend reversal in our view. Even if the pair corrects a bit lower, we expect any setback to remain limited above the aforementioned downtrend line. A possible rebound from near that zone is likely to see scope for another test near 120.55 (R2). A clear break above that level may pave the way for the key crossroad between the 121.70 (R3) hurdle and the downside resistance line taken from the peak of the 15th of December.
Moving forward, we see the case for the euro to remain supported on this outcome, at least for a few days. The key risk to our view is any new second-round polls showing Le Pen closing the gap on Macron.
Today’s highlights:
During the European morning, the only noteworthy indicator we get is Germany’s Ifo survey for April. The consensus is for the current conditions index to have ticked down, while the expectations index is forecast to have risen somewhat. If there is any market reaction on this indicator, we would expect it to be positive for the euro and/or the German DAX, considering that improving expectations may overshadow a slight deterioration in current conditions.
We have only one speaker on today’s schedule: Minneapolis Fed President Neel Kashkari.
As for the rest of the week:
On Tuesday, we have no major events on the economic calendar while on Wednesday, we get Australia’s CPI data for Q1. On Thursday, we have a very busy day, as both the BoJ and the ECB will announce their rate decisions. Expectations are for both Banks to keep their policy unchanged. We think that investors may focus primarily on the ECB meeting, considering the relatively hawkish signals we received at the latest policy meeting and the subsequent reports showing that investors over-interpreted those signals. Finally on Friday, we get Japan’s CPI data for March and Eurozone’s preliminary CPI data for April. We also get the first estimate of Q1 GDP from both the US and the UK.
EUR/USD
Support: 1.0825 (S1), 1.0800 (S2), 1.0775 (S3)
Resistance: 1.0870 (R1), 1.0910 (R2), 1.0955 (R3)
EUR/JPY
Support: 119.00 (S1), 118.15 (S2), 117.50 (S3)
Resistance: 119.80 (R1), 120.55 (R2), 121.70 (R3)
