Next 24 hours: Keep Going or Fill the Gaps?
Today’s report: Euro Pops as France Base Case Confirmed
In our Friday special report covering France first round election risk, we warned of the possibility for an immediate jump in the Euro on the open to 1.0900. Now that this has played out on confirmation of the base case outcome in France, where will the market turn its attention and what will be the next move it takes?
Wake-up call
Chart talk: Major markets technical overview video
- Macron victory
- retail sales
- Yen sinks
- SNB celebrates
- Subdued Aussie
- soft inflation
- Yield differentials
- risk mitigation
- Macro players
- USDTRYÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- What Markets Should Conclude From France’s Election, M. El-Erian, Bloomberg (April 23, 2017)
- Macron to Face Le Pen for French Presidency, V. Mallet, Financial Times (April 24, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market has now cleared major resistance at 1.0906, breaking to a fresh 2017 high, while confirming a higher low at 1.0570. The break strengthens the case for a major bottom and opens the next upside extension towards the 1.1400 area. Setbacks should be very well supported, with only a break back below 1.0570 to compromise the constructive outlook.
EURUSD – fundamental overview
The Euro has popped to a fresh 2017 high on the Monday open as we had warned in our Friday special report. The confirmation of the base case in the France election is a huge comfort to the Euro and risk markets as it seriously reduces risk of a Le Pen presidency that would have seriously undermined the EU. The market is taking comfort in Macron and can now get back to focusing on other market drivers including economic data and central bank risk, with the ECB due later this week. The break above 1.0900 is a significant development and if the major pair can establish above the figure in the sessions ahead, much like with the Pound last week, it will suggest the currency is in the process of carving out a longer-term bottom against the Buck. But for now, the market will continue to digest the result, while also taking in German IFO readings and Dallas Fed manufacturing later in the day.
GBPUSD – technical overview
This latest break back above the December 2016 peak is a significant development as it potentially ends a period of bearish consolidation, warning of the formation of a more meaningful longer-term base. Still, it will be interesting to see how the market responds above 1.2775 and if it can hold above the level in the sessions ahead. If the market holds above 1.2775 in the sessions ahead, it could pave the way for the next major upside extension into the 1.3500 area. If the market is unable to hold above 1.2775 it will suggest a false break and could open renewed downside. In the interim, key levels to watch above and below come in at 1.3000 and 1.2616 respectively.
GBPUSD – fundamental overview
The Pound has settled down following last week’s impressive breakout on the news of the snap election in June. Overall, the market is feeling much better about the outlook for the UK currency, with the election expected to result in a more cohesive, unified support for the PM, which will alleviate plenty of stress when it comes to Brexit negotiations with the EU. Only the Euro is stronger than the Pound over the past week, this after the single currency got a big boost from the France election result. Still, there is uncertainty associated with the upcoming UK election, and despite what could be the elimination of internal stress for PM May, the UK’s fate post Brexit is also up in the air, which could be enough to keep Sterling bulls from getting too aggressive. Friday’s disappointing UK retail sales print hasn’t made Sterling bulls any more comfortable and soft economic data could bring back a lot of the stress associated with the UK outlook in this world after Brexit. But for today, most of the focus will be on the Euro and the French election fallout. As far as the calendar goes, we get UK CBI trends readings and Dallas Fed manufacturing.
USDJPY – technical overview
The recent break of a multi-week range low at 111.60 marked an end to a 400 point bearish consolidation that has now opened the next major downside extension towards a 400 point measured move that targets 107.60 in the sessions ahead. As such, Look for any rallies to be well capped ahead of  111.00, while ultimately, only a daily close back above 112.20 would take the immediate pressure off the downside.
USDJPY – fundamental overview
Not much of a surprise to see the Monday pop in the major pair, with the news of the Macron victory in the France election reducing stress in global markets and inviting a round of profit taking on safe haven Yen longs. But even with this risk out of the way, there are still plenty of stresses in the global economy and this in conjunction with a wave of broad based US Dollar selling in 2017, could make it difficult for the Yen to fall off too hard. Looking ahead, Monday’s economic calendar is rather quiet, with only Dallas Fed manufacturing standing out. Instead, the market will continue to digest the results of the France election and implication for the global risk outlook.
EURCHF – technical overview
Rallies continue to be very well capped, with the market adhering to a broader downtrend of lower tops and lower lows. The most recent rallies have stalled above 1.0800 and a fresh medium-term lower top is sought below 1.0900 ahead of the next major downside extension through the 2016 base at 1.0624 and towards 1.0400 further down. Ultimately, only back above 1.0900 would negate the overall bearish outlook.
EURCHF – fundamental overview
The SNB is in a quiet battle with the market, forced to contend with an ongoing wave of demand for the Swiss Franc in a less certain global environment, especially with the weapon of monetary policy worn down. The central bank has been committed to its mandate of ensuring the Franc does not appreciate further. But despite all efforts, the Franc continues to want to appreciate. It seems the central bank’s strategy has been to sell Francs when risk comes off and to do nothing when risk is back on and natural flows should be CHF bearish. But the trouble is, even with global equities elevated, arguably reflecting appetite for risk, the Franc hasn’t been able to weaken all that much. Clearly the news of the Macron victory in the first round of the French election has been a help to the SNB, but it remains to be seen whether this latest round of Swiss Franc declines can be sustained.
AUDUSD – technical overview
The impressive rally in 2017 has stalled out into significant medium-term resistance ahead of 0.7800. A recent break back below 0.7600 strengthens the prospect for some form of a top and could open the door for a deeper drop back towards the 0.7000 area in the days ahead. However, the market will need to see a daily close below previous support at 0.7475 to strengthen the bearish outlook. In the interim, any rallies should be well capped below 0.7700.
AUDUSD – fundamental overview
The Australian Dollar is taking a back seat on Monday, with most of the attention going to the Euro and Yen as the market responds to the election result in France. While the news has been supportive of the risk correlated commodity currency, the concurrent decline in commodities prices and concerns on the domestic front are keeping bulls from wanting to jump into Aussie longs. Later this week we get some important inflation data out of Australia, but in the interim, the market will be watching mostly from the sidelines, taking its cues from the broader external flows. As far as today’s data goes, Dallas Fed manufacturing is the only notable standout.
USDCAD – technical overview
The market remains very well supported on dips, with this year’s bounce out from the 1.3000 area warning of a more significant bullish resumption. Any setbacks should now be very well supported above 1.3200 on a daily close basis in favour of an eventual push back through the multi-day peak at 1.3599 and towards 1.4000 further up. Ultimately, only back below the 2017 low at 1.2969 would force a meaningful shift in the structure.
USDCAD – fundamental overview
The combination of weakness in the price of OIL, softer commodities, and recent Governor Poloz comments warning the Bank of Canada could not just follow the US on rates, have resulted in a clear underperformance in the Canadian Dollar over the past several days. Friday’s soft Canada inflation figures only add to Canadian Dollar bearishness, confirming the Poloz comments. Looking ahead, we get Canada wholesale sales and Dallas Fed manufacturing, though most of the focus for the day will be on the fallout from the France election and direction in the price of OIL.
NZDUSD – technical overview
The overall pressure remains on the downside with the market expected to be very well capped on rallies. The weekly chart is reflective of this fact as it looks like we’re seeing the formation of a major top off the 2016 high. As such, expect the market to continue to roll over in the days ahead, with setbacks projected towards medium-term support in the 0.6600s. Only back above 0.7400 compromises the outlook.
NZDUSD – fundamental overview
Last week was a good week for the New Zealand Dollar, with the currency up against the Buck on broad US Dollar selling, a well received GDT auction and hot New Zealand CPI. But in the bigger scheme of things, there is also quite a bit of uncertainty and uneasiness out there relating to global risk, while softer commodities, fear of an over inflated global equities market and favourable US Dollar yield differentials are also a drag on Kiwi. Looking ahead, most of Monday’s attention will be on the France election result, with Kiwi taking a back seat. As far as data goes, Dallas Fed manufacturing is the only notable standout.
US SPX 500 – technical overview
An extended run to record highs is finally showing signs of exhaustion in 2017, with the market enter a period of correction. This opens the door for a possible acceleration of declines towards 2270 in the weeks ahead, with a daily close below 2320 to strengthen the outlook for a more significant structural shift. In the interim, rallies should be well capped below 2380.
US SPX 500 – fundamental overview
Bulls remain in control overall despite recent setbacks, though there have been legitimate cracks at the surface in the month of April. This month’s Fed Minutes citing equity overvaluation and possible balance sheet shrinkage later this year haven’t been stock market positive, while the rise in geopolitical tension and sup-par Goldman Sachs earnings are only increasing stress. Furthermore, the market is waking up to the fact that the new US administration’s alternative take on diplomacy could make for a less predictable path for equity markets. But again, for now, only cracks, with investors still comfortable playing the game of trading sideways (not down) on stress and then rallying to fresh record highs on any signs of an elimination of the stress. The news of the Macron victory in the France first round election is one of those stories that has reduced stress, with stocks ripping up on the weekly open.
GOLD (SPOT) – technical overview
The market has been very well supported since basing out ahead of 1100 in 2016. This latest break to another yearly high through 1265 strengthens the outlook, confirming the next higher low at 1195, while opening the door for the next major upside extension towards a measured move into the 1335 area. Look for any setbacks to be well supported ahead of 1230, with only a break back below 1195 to compromise the constructive outlook.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about the limitations of exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity in demand, with many market participants also fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Meanwhile, a bout of US Dollar selling (bullish gold on inverse correlation) in 2017 has also kicked in as the market gives more serious consideration to US policies that are likely to direct the US Dollar lower.
Feature – technical overview
USDTRYÂ has been in a period of choppy consolidation since topping out at a fresh record high earlier this year. At this point, the structure continues to favour the topside, with scope still existing for a bullish continuation to yet another record high. At a minimum, a break and close back below 3.5580 would be required to potentially force a shift in the outlook and open the door for a more significant bearish corrective phase.
Feature – fundamental overview
The currency market is still taking time to digest the latest result in the Turkish referendum which produced a narrow “Yes” victory for President Erdogan. On the one hand, the result can be viewed as Lira supportive as it reduces political uncertainty which should translate into more stable economic policy. On the other hand, the move to grant an unlimited amount of power to the President could pose risk on the global stability front, which would be viewed as Lira bearish. And so, the Lira has been mostly sideways in the aftermath. Of course, going forward, geopolitical risk, the US administration’s protectionist policies and possible vulnerability in global equities are other themes that need to be considered with respect to the outlook for the emerging market currency. Into Monday, the Lira has received a bid, though this has come from US Dollar selling and risk on flow post France election results.