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Euro Explodes Higher on French Election – Should You Buy or Sell?

Euro Explodes Higher on French Election – Should You Buy or Sell?

The euro exploded higher after centrist Emmanuel Macron “won” the first round of the French Presidential election.  Of all the probable scenarios, this was the best outcome for the euro, which explains why EUR/USD gapped above 1.09 when the markets opened for trading on Sunday evening. Although the EUR/USD would have taken out 1.10 if Marine Le Pen failed to advance to the final round of voting, the chance of that was extremely low. Instead, investors are satisfied that the polls in France have been accurate and that Macron has a good chance of a sweeping victory over Le Pen on May 7th.  France would be set on 2 very different courses depending upon who wins the election.  Macron is pro euro, pro EU whereas Le Pen wants a referendum on EU membership shortly after her victory.  With this in mind, there has been very little follow through in the euro during the Asia, European and North American trading sessions, leading investors to wonder if the gap near 1.0730 will be filled.

While it can be argued that we won’t know who the final winner will be for 2 more weeks, Macron has a very good chance of winning so there’s less need for investors to hedge against a Le Pen victory.  Unlike the euro, French stocks have largely held onto their gains which is a sign of investor confidence.  The latest German IFO report also supports a stronger currency with the business confidence index rising to 112.9 from 112.4.  However there are 2 big risks for the euro this week – the first is Thursday’s European Central Bank monetary policy announcement and the second is a tax reform announcement by U.S. President Trump on Wednesday.  The ECB has been uncomfortable with the market’s hawkish interpretation of their last monetary policy decision and while data has been largely better, inflation remains very low.  The central bank wants the market to understand that policy is accommodative and will remain so for the foreseeable future and if thats emphasized on Thursday, the euro could fill its gap quickly.  But that could also happen before the central bank’s monetary policy announcement if progress is made on U.S. healthcare and tax reform.  A large part of the dollar rally after the U.S. election was driven by the prospect of lower taxes and with tax cuts back in focus, the dollar is starting the week strong.  Until we are assured that progress on U.S. tax reforms won’t be announced this week and the ECB won’t hurt the euro with dovish comments, the chance of the gap in EUR/USD being filled is greater than the chance of a move to 1.0950.