Politics Dominates Euro and Pound Moves, Markets Wait for Trump

Updated on
  • Data, French developments boost euro but elections limit gains
  • Pound drops as talks of second Scottish referendum re-emerge

BlackRock's Harrison Sees Italy as EU's Biggest Risk

The euro rose against the dollar as weekend developments in the French presidential elections and better-than-expected economic confidence data boosted the currency, although gains were limited by underlying political risks.

The single currency climbed after euro-area economic confidence rose to the highest level in almost six years, in a sign of continued momentum in the region. That followed favorable opinion polls for independent presidential candidate Emmanuel Macron. Still, with the French election, along with next month’s Dutch vote, remaining as risk events for the currency, it is still among the worst-performing G-10 currencies against the dollar this year.

The pound dropped against all its G-10 peers on reports that British Prime Minister Theresa May’s team is preparing for Scotland to potentially call for an independence referendum. It stayed lower even after May’s spokesman said on Monday that there should be no second Scottish vote. A broader gauge of the dollar was little changed before a key speech from U.S. President Donald Trump on Tuesday.

  • There’s been a “shift in FX market dynamic where earlier mono-political, policy noise from the U.S. has evolved into stereo noise from both the left and right side of the Atlantic,” wrote analysts at JP Morgan, including Paul Meggyesi
    • “Europe has reasserted itself as a generator of market moving political headlines, initially driving the EUR closer to turn-of-the-year lows versus the dollar, and 11-month lows in trade-weighted terms” before retracing
    • JP Morgan’s baseline EUR/USD forecast sees weakness limited to 1.04 in 1Q, before climbing to 1.15 by year-end
    • They hold “short EUR in the portfolio, but on European crosses rather than versus the USD”
  • An index of executive and consumer sentiment in the region increased to 108 in February from 107.9 the previous month, the European Commission in Brussels said Monday
  • Independent French presidential candidate Emmanuel Macron opened up his biggest lead yet over Republican Francois Fillon and began narrowing the gap with National Front leader Marine Le Pen: Link
  • The Times cited unidentified government sources as saying May could agree to a new Scottish vote, but on condition it is held after the U.K. leaves the European Union. 
  • EUR/USD climbs 0.2% to 1.0583. Friday’s reversal candle against 13-DMA keeps bears still in charge
    • Resistance at 1.0618, Feb. 24 high and then 1.0635, Feb. 20 high
    • Support at 1.0538, Feb. 23 low and then 1.0494, Feb. 22 low
  • The Bloomberg Dollar Index was little changed at 1236.40 on Monday
  • GBP/USD drops 0.4% to 1.2411
  • “The U.S. dollar is awaiting fresh direction in the near-term which could be provided by President Trump’s address to Congress,” writes Lee Hardman, currency analyst at MUFG. A lack of reassuring details “could prompt the market to push back the timing of likely stimulus beyond this year

— With assistance by Sejul Gokal

(Adds details of May’s response to Scotland reports in the third paragraph.)
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