EUR/USD at 6-month high, Stoxx 50 at 20-month high – Buy the Rumor, Sell the Fact?
EUR/USD jumped to a 6-month high of 1.0987 on Thursday and the Euro Stoxx 50 index jumped to a 20-month high of 3627.9 levels. The currency pair sits around 1.0975 levels in the Asian session today.
Is Macron victory already priced-in?
The latest data from Reuters Lipper shows European stocks continue to attract funds from across the globe. This clearly suggests markets are pricing-in Macron victory in the second round of the French elections this Sunday.
The polls regained credibility after the first round ended with Macron in the lead followed by Le Pen. This came as a relief for the investors who were worried about anti-EU candidates – Le Pen and Melenchon – heading into the round two.
Over the past two weeks, the polls consistently showed Macron maintaining a healthy lead over Le Pen. Thus, investors desperate for yield had little reason to hold back from pouring money into the lagging European markets.
No wonder, the single currency rallied across the board and the Stoxx 50 index hit 20-month high. It is quite evident that what we have witnessed over the last 10-15 days is a classic ‘Buy the rumor’ trade and investors may take profits (Sell the fact) if Macron wins the second round as expected.
What if Le Pen wins?
This would be a disaster as the market activity clearly suggests the investors are not at all prepared for Le Pen win. The Euro would be offered across the board as investors would ditch European stocks in favour of safe haven assets.
As for today, the focus is on the US non-farm payrolls number and wage growth data. A strong data could avoid a break above 1.10 handle, although it is highly likely that the psychological level could be breached if the European markets extend the Macron rally.
EUR/USD Technical Levels
The daily chart shows a bullish engulfing candle, suggesting potential for further gains. A break above 1.10 handle would open up upside towards 1.1058 (Oct 14 high) and 1.11 (zero figure). On the downside, support is seen at 1.0934 (5-DMA) and 1.0913 (10-DMA). A daily close below 1.0875 (previous day’s low) would expose 1.0838 (200-DMA).
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