EUR: Reprieve from populism? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that EUR/USD hit a high around 1.1023 before moving back following the overwhelming victory for the pro-EMU Macron over far-right candidate Le Pen in the second round of the French Presidential election as it is being treated as a victory for liberalism vs. populism. 

Key Quotes

“That said, while the markets have breathed a sigh of relief, Macron’s victory was widely expected.  Not only had a strong relief rally lifted the EUR after the first round of voting in April, but we would argue that a reduction in perceived political risk has been behind short-covering in the EUR since the start of the year.  Looking forward, the EUR may need a fresh incentive if it is to continue its upward move vs. the USD.”

“While the French parliamentary elections will demand some attention from the markets, over the rest of the spring and summer it is likely that the focus on European politics will slip.  If the EUR is to retain its upward path vs. the USD, a fresh incentive may be needed.  As well as receding fears of political risk, some of the EUR’s better tone this year can be linked with improved Eurozone economic data and the related debate regarding the outlook for ECB policy.”

“There is speculation in the market that the ECB could alter this guidance in the coming months to suggest a reduction in policy accommodation early next year.  The EUR may need a less dovish ECB for EUR/USD to push more convincingly above the 1.10 level, particularly given market expectations of a Fed rate hike on June 14.  The next ECB policy meeting is scheduled for June 8.”

“Our long-standing year-end target of EUR/USD 1.10 has more of less been hit.  While we have a 12 mth forecast of 1.12 we are currently reluctantly to revise up our EUR forecasts aggressively given the dovish guidance of the ECB.  Without a clear change of tone from Draghi, it is possible that the spate of short-covering that has been boosted the EUR since the start of the year could run out of steam.  Near-term there is the possibility of some profit-taking in EUR/USD so for now we retain our forecast that EUR/USD could trade in the 3 to 6 month horizon and keenly await the direction of the ECB next month.”