Will the Euro Continue to Suffer from Political Risk?

Key Points:

• Euro impacted by political unrest as Far-Right party gains ground in France.

• Watch for the EU CPI Flash Estimate result.

• Euro parity proposition still likely in medium term.

The Euro declined steadily throughout most of last week to touch a low of 1.0492 before recovering a portion of losses to close the week out around the 1.0556 mark. Much of the initial selling came following mounting concerns of political instability in Europe with increased risk of victory by Marianne La Pen’s far right wing party in France. Subsequently, it makes sense to review the salient events that led to the decline and to assess what is potentially on the horizon for the pair.

Last week saw a relatively steady depreciation for the Euro Dollar, which sent it to new lows at 1.0492 before it clawed back some of the losses to close around the 1.0556 mark. Much of the initial selling was spurred by mounting political risk within the European Union. In particular, the odds of a victory by the far-right French candidate Marianne La Pen are increasing and this is over shadowing the current EU PMI results. Subsequently, the Euro was under pressure for most of last week but the pair did receive a much needed boost when the US initial jobless figures showed an uptick to 244k. Regardless, the sentiment swing was only temporary and the pair still declined late into the week.

In fact, the move towards the extreme right in Europe has been a gradual process over the past few years largely in response to the refugee and economic crisis that the continent has faced. However, the move has been solidly opposed by the very many left wing pressure groups and it is likely that any eventual election of a far right party, such as Marianne Le Pen’s, will result in mass demonstrations and economic shutdowns throughout much of France. This of course poses a sharp threat to the Eurozone economy given that, along with their current problems, the last thing they need is political turmoil.

Looking ahead, the coming week has plenty of fundamental economic information for the market to digest. In particular, the EU CPI Flash Estimate will play a relatively key role in determining the near term trend. Inflationary pressures have been relatively lacklustre within the Eurozone of late but the current buoyancy of oil is likely to start having an impact on CPI gains. In addition, there is a bevy of US economic indicators due for release but the market will focus strongly upon the unemployment claims data, which showed an uptick last week, as a gauge of FOMC action next month. Subsequently, some volatility could be apparent around the release of the labour market data which is likely to impact the Euro Dollar.

From a technical perspective, last week’s dip to a new low of 1.0492 was indicative of the current risk-off market. However, our initial bias for the week ahead remains neutral given that RSI has flattened within neutral territory and price action appears to have formed a short term temporary bottom. However, the medium term suggests that the decline from 1.0713 is still in progress and further downside action is likely. Support is currently in place for the pair at 1.0530, 1.0400, and 1.0364. Resistance exists on the upside at 1.0678, 1.0758, and 1.0872.

Ultimately, the Euro Dollar is likely to face ongoing volatility in a similar manner as the greenback experienced during Trump’s ascension. However, the week ahead is likely to focus less upon the current political turmoil and more on some of the underlying economic variables such as the EU CPI Flash Estimate. Regardless, the Euro may very well be heading to parity in the medium term, especially if there is further political unrest.