Round Two for the Euro

Given the recent good news from France that has buoyed international markets, it might be time to consider current sentiment around the Euro, in particular EURUSD as a currency pair. As a result of the first round of the French election, in which Emmanuel Macron won 24% of the vote, fears of the doomsday Le Pen Mélenchon scenario, which would have pitted the hard left versus the hard right in the second round, were allayed. Furthermore, whilst Macron's early celebrations have been portrayed by some in the press in a negative light, rendering them in hindsight, perhaps better left till later, polling indicates he will win the second round by a comfortable margin, earning up to 64% of the overall vote. This should see the implementation of much needed reforms, providing the French a chance to push their often seemingly plodding economy forward. That said, the fact remains that the bump in the value of the Euro following Macron's win is arguably motivated more by sentiment than coherent facts on the ground. There is a reason the Euro has been performing poorly for some time, and, loosely put, a currency union synonymous with the phrase kicking the can down the road, has not, and nor is it likely to, become a dynamic and flexible international darling overnight. Whilst EURUSD has, for instance, climbed to three month highs, in the $1.094 range, there is a strong possibility that recent highs will prove to be a chimera.

The Nature of the Currency

There are plenty of things to like about the Euro, not least how it vastly simplifies internal transactions within the Eurozone itself, however, as has been known for some time, the currency has significant structural flaws, as do several of its member countries. The lack of either a fiscal union, or an internal system of redistribution allows trade imbalances inside the Eurozone to continue to grow. With no means of correction, this triggers vicious depressive downward cycles in its weaker members' economies, with the evergreen Greek crisis the obvious example. Indeed, the Greek problem appears to have stopped worrying markets simply because now one just says 'yes, but you know, that's Greece', rather than recognise that the country's downward cycle just keeps continuing, with fourth quarter 2016 GDP, for example, down 1.2% Essentially the Euro is a currency, if you'll forgive the metaphor, that looks and behaves like a middle-aged bachelor, pottering through its routines, because that's what life is all about. In this way it reflects the European response to all but the most significant crises, find a compromise, and muddle through.

That there is something to be said in favour of the politics of compromise can certainly be argued, but from a trading perspective, the Euro seems set, for the time being at least, to remain an idea in search of motivation, whilst looking at times even like a solution in search of a problem. Recent climbs by the currency against the dollar ought not hide the fact that the Euro was valued at around the $1.05 mark for a reason. Since nothing other than sentiment has changed recently, it seems a reasonable bet that the European currency will, in the medium term at least, find itself soon enough again valued around the $1.05 mark.

The Euro and The Upcoming Second Round in France

Barring a major upset, the second round in France, on May 7th, looks set to send Macron to the Élysée Palace. The pollsters are confident, the press is confident, and despite a few scares here and there, and some interesting grandstanding acts, such as Marine Le Pen's hijacking of Macron's visit to a closing Whirlpool factory, being confident about a Macron win seems to be the position adopted across the board. There is of course the risk that Le Pen will buck the polls, and that the far-right will end up in charge of France, in which case, all bets are off, and Euro holdings will be significantly reduced in value. Even writing this however, seems like thinking the unthinkable. What seems certain, and something to be thought of when considering a EURUSD position over the next few weeks, is that in the run up to the second round, the Euro should dip somewhat, as nerves begin to kick in across the market. This may present an opportunity for a quick buy, probably around the $1.075-$1.085 range. Following this, if all goes according to plan, and Macron does indeed win, then the Euro is likely to climb to the level of recent highs, peaking perhaps a little higher than it did after the first round results were published. Given the general sluggishness of the Eurozone, and the Euro itself, this might then be the time to sell.