In view of Olivier Korber, Research Analyst at Societe Generale, the EUR/USD has been trading in a 1.04-1.16 range for more than two years, and is likely on its way to appreciate towards the upper bound.
Key Quotes
“The first round of the French election was a significant landmark for the price action. The FX rate broke at the same time its horizontal support at 1.08 and a descending trend line, also meeting this level, realising a breakaway gap at the opening on Monday, 24 April. Gaps are pretty infrequent in the 24/24 FX market, and more likely to open after a weekend, but they are nonetheless unimportant. Here, the combination of technical and political signals suggests that the bullish move is not exhausted yet.”
“ECB and French legislative election set to lift the euro
The two main risk factors ahead are likely to fuel the euro momentum. The market will focus first on the 8 June ECB meeting, and then, and to a lesser extent, on the French legislative election. The former will clearly be a bigger market mover than the latter, according to the current event risk pricing of the two dates.
- Political risk virtually vanished after the first round of the presidential election, and polls currently suggest that Macron’s party will gain a majority at the assembly, considerably smoothing the process of implementing the reforms that the market is welcoming. The legislative election should therefore be neutral to mildly bullish for the euro.
- The ECB meeting is more pivotal now that the board is freed from political tail risk and that German Chancellor Merkel recently complained that the euro is “too weak, because of ECB policy”. In the near term, the downside risk for the euro is that the ECB could reduce its inflation forecasts, but the general thinking is that it will alter its forward guidance, removing the bias for lower rates or stronger QE. Such a hawkish tilt would lift the euro.”
“The French legislative election and the next ECB meeting should prevent the EUR/USD from congestion around 1.12, and propel it towards the top of its range. However, this won’t be enough to decisively pierce the 1.15-1.16 bound in the coming weeks, in our view.”
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