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Euro fall continues as it heads into French election risk

April 08,2022 06:43:06

Overnight Headlines

*Dollar inches up to new two-year peak, set for best week in four

*10-year US Treasury yield touches three-year high following hawkish Fed

*Oil drift lower, set for 3% weekly fall due to massive stocks release

*Asian stocks slide amid fed, China virus worries

US equities lifted modestly (S&P500 +0.4%, Dow +0.3%, Nasdaq +0.1%) but are currently down on the week. Markets weighed Fed comments from well-known hawk Bullard and geopolitical tensions against US economic data. Defensives massively outperformed as value topped growth for a third day in a row. Asian markets are mostly higher, but China is softer on Covid worries and weak macro data. US futures are mixed to mildly green.

USD is edging up towards 100 on the DXY.  EUR recovered back above 1.09 after the relatively hawkish ECB minutes. But this didn’t last long, and sellers are back in charge as we head closer to 1.08. GBP closed largely unchanged at 1.3074. This week’s low at 1.3045 is support. USD/JPY was firm as it looks to try and push above 124. AUD fell again but is trying to consolidate around 0.75. USD/CAD rose for a third day on lower oil prices. The 200-day SMA sits above at 1.2618.

Market Thoughts –Macron set for tight battle?

Risk of a populist upset in the French presidential elections is sending jitters through markets and dragging on the euro and French debt. Ahead of the first rounds of voting this Sunday, a victory for far-right leader Marine Le Pen over incumbent Macron is still unlikely, but within the margins of polling error. We note that Betfair has the current President with a 78% chance of winning over Le Pen at 21%.

Options covering both the first round of voting and next week’s ECB meeting are showing fears of major EUR downside in the coming days. That said, they are far from extreme-event levels. It is a near certainty no French president candidate will win a majority. Focus will be on the spread in performance between the two leaders in the first round of voting. This is expected to be around 3% to 4%.

Chart of the Day – EUR/AUD strong downtrend pauses

This euro cross topped out in early February at 1.6202. Of course, the tragic conflict in Ukraine has seen the single currency sink, while commodity currencies have surged. Prices spiked lower to 1.4563 around a month ago and the subsequent rebound got close to long-term support/resistance at 1.5354.

But failed peace talks, and a potentially more hawkish RBA have seen the downtrend continue. The pair made a new low at 1.4320 earlier this week before another retrace. There is bullish divergence with a higher low in the RSI matching a lower low in price. We will be mindful of weekend gap risk with strong resistance at 1.4942. Next major support after the current lows is 1.4050.

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