The first round of French elections were up this weekend. Like a London Marathon runner carrying a fridge and approaching the finish line, the European Union breathes a sigh of relief.
European equities were up across the board. The Euro rallied in the Asian session jumping 2% against the US Dollar. You can view the movement on EUR/USD on the graph below.
This in turn pushed GBP/EUR south. We can wave goodbye to 1.20 the figure for the time being. Why did the Euro spike higher on the results? The Centrist candidate, Emmanuel Macron, and the Far right candidate Marine Le Pen, brought down the established parties and candidates and surged through to the second round. However, it seems that Emmanuel Macron will have an unsurmountable distribution of the votes so it would suggest that he will be the next French President come early May. Cue a dumping of safe haven assets like Gold and Yen and a move back to a ‘risk on’ environment.
The polls have been wrong a number of times recently. However, it would be a colossal miscalculation if Macron didn’t win. We can thus say goodbye to the awful term of a ‘Frexit’.
What does this mean for GBP/EUR? I think we can now expect a downtrend to resume. There is a relief rally going on with the single currency at present and this may fade pushing Sterling/Euro higher in the short-term. However, I expect towards the end of Q2 for us to be targeting 1.15 on GBP/EUR. Why? The Eurozone is continuing to improve. Take the PMI readings last week for example. Add to this the easing of political risk across the EU. We have the ECB meeting this week where we will learn more from Mario Draghi, the ECB president. Will he cut back on stimulus? Will he implement this in June post the expected unveiling of Macron in May? We will know more from his policy announcements on Thursday.
Markets will largely be focused again on the Eurozone for the time being. If you have a EUR requirement this week please get in touch with a member of the trading department to discuss a strategy to mitigate some of your short-term risk to EUR moves.
You can view the volatility on Sterling/Euro from last Monday to this morning below –
Elections seem to be in vogue at present. We haven’t had enough recently it seems. Before the French elections we had Theresa May, the UK Prime Minister, announcing a snap general election on Tuesday. That blew the cobwebs off dear old Sterling and sent it spiralling higher. Has May done the right thing by calling a General election? Probably. It will undoubtedly strengthen her hand in negotiations with the EU. Will she win the election? If she doesn’t, we may as well turn off the lights. The markets backed May’s decision hence the movement higher in GBP. Will this continue? As stated earlier I expect a downtrend in Sterling to surface once we have to jump into the raft and navigate rocks and dangerous waters akin to white water rafting during negotiations. The UK economy has punched above its weight since the referendum result. Will Q3 prove the quarter when perhaps a slightly more realistic picture is painted of what is down the line for UK PLC? Retail Sales last week posted the biggest fall in seven years. Inflation is creeping up and is likely to hit 3% early next year if not the end of 2017. Prices are going to continue to rise for the consumer and with slowing real wages consumers are tightening their belts. Consumer confidence is falling. The UK will also need to address its Fiscal position at some point although we’ll kick that down the road for now whilst we focus on the General Election.
If you have a Sterling exposure please do get in touch.. Markets are driven by mainly political rather than economic fundamentals at present. We are seeing moves of between 1-2% on an intraday basis. Please make sure you have a plan in place to mitigate your ongoing risk whilst currency volatility continues.
It would be rather remiss of me to forget to mention our cousins across the pond and the US Dollar. Market focus is currently on the Eurozone although there are a few important developments and announcements out of the US. We have durable Goods orders out on Thursday with preliminary GDP (Q1) figures released on Friday. We also have the small matter of spending authorisation going on with US Congress with the potential for a Government shut down this week. That would be some first 100 days in office for the man with the blonde hair.
I expect the US Dollar to resume some strength after a bit of kicking from Sterling and Euro over the past week or so. You can view the movements on Sterling/Dollar from last Monday to this morning below –
If you hold US Dollars and are looking to convert into Sterling please do consider staggering marker orders to take advantage of any moves in your favour in the coming weeks. I would expect Sterling/Dollar to drift lower short-term. If you need to purchase USD it may be prudent to take advantage of the shift higher in the past week and lock in some of your USD on a SPOT basis. Feel free to contact the Trading Department or myself directly for a rate of exchange.
Well, the past week was a quiet one. Expect more volatility and unexpected movements in the coming weeks and months ahead. Please make sure you have a strategy in place to protect yourself against adverse movements.
If you have any questions whatsoever please do let me know.
Have a fantastic week.
Written by Liam Alexander