Fundamental Forecast for EUR/USD: Neutral
– French-German yield spreads widening back out, reflecting the market’s uncertainty over the outcome over the French election.
– The retail crowd remains net-long EUR/USD, which as a contrarian indicator means losses could persist.
– See how the French elections fit in with our Q2’17 EUR/USD forecast.
The Euro lost ground against every major currency (save the US Dollar) last week, as a quiet economic calendar during a holiday-shortened week gave plenty of room for speculation around the French elections to dictate the market’s mood.
With the first round of the French presidential elections fast approaching next Sunday, April 23, traders will want to watch developments in the polls. The overall front-runner, Emmanuel Macron – who, according to French polling institute Ifop has the best chance to beat right-wing populist Marine Le Pen in a second round runoff – has continued to slip. According to Oddschecker, the aggregate probability of a Macron victory has fallen to 52.9% from 66.7% on March 31. With first round polling figures showing that the top four candidates are within four percentage points of one another (Le Pen, Macron, Fillon, and Melenchon), it is very possible that Macro doesn’t make it to the second round – which would be a veritable reason for concern for the Euro.
Certainly, market participants are starting to prepare for the worst, with one-month implied volatility for EUR/USD having increased from 7.25% to 13% over the past five weeks, and it now sits at its highest level since the Brexit vote in June 2016. The easiest place to spot the growing concern over the French election in the market is 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 73.8-bps, up from 56.9-bps two months ago.
