Macron wins... Fed could retake center stage, will EUR/USD drop?

Macron has won the second round of the French elections as widely expected and the forex markets have reacted by dumping EUR ‘on the fact’.

EUR/USD jumped to a high of 1.1022 in early Asia in a knee jerk reaction to Macron victory before falling back to 1.0975 levels.

Fed to retake centre stage?

Over the last two months or so, the Fed policy has been literally overshadowed by the geopolitical tensions and French election risks. What is perhaps the most important news of the last five years - Fed balance sheet normalization -received very little attention from the markets. This is evident from the drop in the US dollar to a six-month low against the EUR.

However, things appear to have calmed down on the geopolitical front. French election risk is out of the way as well. Moreover, anti-EU Le Pen’s loss is widely seen as an end of right wing populism.

Consequently, the markets are now more likely to take into account the rapidly changing Fed policy. Following the last week’s Fed rate decision, the June rate hike odds jumped to 90% (as per Bloomberg calculations). As per the CME data, the odds of the June rate hike stand well above 70%.

The talk of Fed balance sheet normalization is gathering pace as well. St. Louis Fed President James Bullard said on Friday that he would advocate shrinking the $4.5 trillion balance sheet to $2 trillion. That amounts to a 56% drop in the balance sheet size. San Francisco Fed President John Williams also echoed similar sentiments.

The American dollar may regain poise this week as markets are more likely to focus on the Fed policy. Furthermore, unwinding of the ‘Macron trade’ could also help the US dollar regain the bid tone.

EUR/USD Technical Levels

Watch out for a failure to hold above the descending trend line (sloping downward from May 2016 high and Nov 2016 high). A break below 1.0951 (Apr 26 high) would open up downside towards 1.0875 (Thursday’s high) and 1.0852 (Apr 27 low).

On the higher side, only a daily close above 1.10 (psychological level) would open doors for 1.1047 (Aug 2016 low) and 1.1104 (Oct 7 low).