Fundamental Forecast for EUR/USD: Neutral
- Euro under pressure across the board last week as odds of a Marine Le Pen victory during the French elections seem to be creeping higher: Brexit/Trump 2.0 for markets?
– Ex-political concerns, more evidence builds that the broader Euro-Zone economy is steadily improving.
-Â Positioning in EUR/USD and EUR/JPYÂ are now net-long, a contrarian signal for further losses in the pairs.
The Euro slipped against all of its major counterparts last week, a sign that political risks are creeping in on the single currency just months out from a series of crucial elections. With Dutch elections in March and the French elections in April and May, it seems market participants, recently burned by the dual surprises of the June Brexit vote and Donald Trump’s November victory, are not being so quick to dismiss the risks that the wave of right-wing populism poses to financial markets this time around.
While EUR/USD only fell by -0.50% by the week’s close, it had briefly dipped under 1.0500 amid signs that the National Front’s Marine Le Pen was becoming a legitimate force be reckoned with. Yet after François Bayrou, the centrist who was widely considered the fourth man and spoiler in the French presidential elections, stepped down while throwing his support behind Emmanuel Macron, the independent who currently (according to polls) has the best shot to stave off Le Pen, the Euro found some relief, rallying back through 1.0600 briefly by Friday.
The easiest place to spot the growing concern over the French election would be in French OAT yields, particularly how they’ve traded relative to German Bunds over the past month. The 10-year French-German yield spread closed this past week at 74.2-bps, up from 56.9-bps one-month earlier. As a proxy for rising political risk in the Euro-Zone more broadly, the 2-year US-German yield spread closed at 2.089% on Friday, up from 1.886% on January 27.
