EUR/USD: Guided by politics or economics? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, suggests that the political influence is clearly high on the agenda for the EUR. 

Key Quotes

“Even though most opinion polls have consistently indicated that far-right candidate Le Pen will not win the second round of the French Presidential election in May, investors are proving their scepticsm and have been looking to take insurance.  Le Pen’s threats of ‘Frexit’ and concerns that a currency re-denominated could result in a French bond default have unsurprisingly pressured the French government bond market.  However, yesterday’s announcement from Bayrou that he will not stand separately in the Presidential election and will instead support Macron strengthened the chances that a centrist government will be installed after the spring election.  The news lifted the EUR and proved the unit’s sensitivity to news surrounding the French election.”

“That said much of the movement in assets caused by the approaching French election has been within the confines of the Eurozone.  This is demonstrated by this month’s sharp widening on the Bund-Oat yield spreads.  The fact that the Bund market is perceived as a safe haven will cushion the scope for pressure on the EUR into the election.  Downside potential for the EUR may also be limited by the improvement in Eurozone economic data since the start of the year and by the perception that the EUR could be subject to relief rallies should the opinion polls prove correct and Le Pen fails to win the Presidency.” 

“The combination of hope for a spring rate hike from the Fed and concerns regarding the French presidential election have the potential to drive EUR/USD to the 1.05 in the weeks ahead.  That said, on the view that the Fed may stall and assuming that Le Pen does not make it to the Elysee Palace we expect EUR/USD to return to the 1.07 area on a 3 mth view.”