EUR: Le Relief Rally - TDS

The analysis team at TDS explains that Macron leading Le Pen nearly two-to-one in second polls for the upcoming run-off French election resulted in markets favourable reaction pushing the EUR higher.

Key Quotes

“Attention in Europe had been focused on the first round of the French president election, which in the end delivered the anticipated Macron – Le Pen runoff in round two. But with the initial vote in a near statistical dead heat among the top four candidates going into the Sunday vote, markets were positioned for a potential far left – far right contest in the second round that would have heightened the risk of Frexit. With Macron leading Le Pen nearly two-to-one in secondpolls for the upcoming run-off election – and with some faith restored in polling – markets have reacted favorably.” 

“The peak of electoral uncertainty pushed Bund yields to a low of 15bp, but yields have since rebounded sharply following the election result. We believe that the risk of Frexit has materially receded and markets will focus on a possible ECB policy shift later this year. We believe the ECB will announce its taper plans in the autumn, which ultimately will help to reduce the market’s singular focus on the Fed and the USD. Capital flows should then rotate towards the EUR. As a result, we think it is increasingly likely that the 1.0341 lows observed in early 2017 marked the bottom for EURUSD and, with an eye towards the medium-term, that it is prudent to accumulate on dips. We think this process will be faster for EUR/crosses but slower with EURUSD. We acknowledge, however, that stubbornly low core inflation, a mixed balance of payments backdrop, and a cautious tone from Draghi (for now) should prevent the EUR from achieving escape velocity.”