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April 2017

Euro continues its surge against all major currencies

Published: Tuesday 25 April 2017

  • Euro continues its surge against all major currencies
  • French presidency candidate Le Pen to temporarily step aside as Front National Leader
  • Markets to focus on President Trump’s tax reform announcement on Wednesday
By Denzil Rickerby
Yesterday saw the Euro continue its relief-style rally against the pound, and all major currencies, after it was declared Macron and Le Pen reached the final round of the French elections.  Centrist Emmanuel Macron is the ‘continuity-candidate’ for the markets – ironically as he does not come from either of France’s major parties. A Macron victory is positive for the Euro hence its gains. Investors are satisfied that the polls in France have been accurate and Macron has a good chance of a sweeping victory. Currently polls suggest Macron will win 62% of the vote vs Le Pen’s 38%.  However, the result of the French election is not a done deal and we should expect to see Euro gains limited because the prospect of a Le Pen win in the final round cannot be completely dismissed like we experienced firsthand with a Brexit and Trump victory.

The danger for Macron is Le Pen’s supporters come out in force in the Second Round while his own stay at home assuming it’s a done deal.  Also, is Macron able to attract the support of the losing candidates?  The second and final round is Sunday 7th May, meanwhile ongoing polls and a TV debate on 3rd May will dictate movement for the Euro.  Yesterday evening Le Pen announced she’ll temporarily step aside as Front National leader to focus on becoming president. It appears to be a way for Le Pen to embrace a wider range of potential voters as she’ll be above partisan considerations.  Those who like Le Pen but not necessarily Front National may cast their vote for her.  Charles de Gaulle did the same in 1958 portraying himself as a universal leader rather than just a political party leader.

The focus for this week will now turn to the European Central Bank monetary policy announcement and the tax reform announcement by U.S. President Trump on Wednesday. The markets are thinking that ECB President Draghi could taper their QE programme faster once the French hurdle is cleared, however, it is coming clear that the ECB are uncomfortable with the markets hawkish interpretation of their last monetary policy, with inflation still below their target.  So President Draghi, may take this opportunity to emphasise their policy and will remain accommodative for the foreseeable future, which could see the gap which was created from the French elections - where the market closed on Friday and opened on Monday - filled.

After President Trump’s first failed attempt on healthcare, the focus will turn to his tax reforms. The reflationary USD rally we experienced after a Trump victory was partly on the prospect of lower taxes. During his campaign President Trump said he wanted to cut corporate tax to 15% from 35% however both Republicans and Democrats are pushing for less drastic changes which could result in another humiliating failure for President Trump, resulting in the USD being sold off aggressively.

The US government is once again on the brink of another shutdown on Friday, however, with Republicans controlling both houses, the chances of shutdown is slim. We are likely to see a temporary extension passed whilst the longer term measures are being negotiated, like that of the funding of the border wall and subsidies over Obamacare.

Apart from UK GDP on Friday there is little on the economic calendar for the UK, Sterling will likely take its cue from markets’ appetite for the US dollar highlighted above.


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