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This week, Market Analyst Paul Robinson, Senior Currency Strategist Christopher Vecchio, and Trading Instructor Tyler Yell, CMT gathered to discuss the announcement of snap elections in the UK and how it might impact Brexit and the British Pound, how traders should approach the Euro with French elections this Sunday, and what might happen to the US Dollar as markets continue to discount fiscal stimulus and a faster Fed rate hike cycle.
Chart 1 : GBP/USD Daily Timeframe (June 2016 to April 2017)
Today, we took a look at a chart of GBPUSD, and with the rally this week on election news it broke the neckline of a big picture bottoming pattern (inverse head-and-shoulders). Cable still has its work cut out for it, but it’s holding well at resistance which comes in the form of lows back in July and August.
The fact the Tuesday rip has held so well against such a big level suggests it will make an attempt to push on through. With that in mind, looking to the left, there isn’t another area of major resistance until the 13400/500 vicinity. A break back below 12500, negating the Tuesday surge and neckline, would be required to turn this view neutral. –PR
See how the retail crowd is positioned in GBP/USD on the IG Client Sentiment page.
Chart 2: EUR/USD Daily Timeframe (February 2016 to April 2017)
Market participants have priced in a significant move around Sunday's results, with one-month implied volatility for EUR/USD having increased from 7.25% to 12.63% over the past six weeks, and it now sits at its highest level since the Brexit vote in June 2016. Likewise, EUR/USD one-week implied volatility is at 19%, eclipsing the highs ahead of the US presidential election in November and back at its highest level since the Brexit vote. This means EUR/USD could trade as low as 1.0400 or as high as 1.1000 depending upon the outcome of Sunday’s vote.
Traders should absolutely brace themselves for a gap open at the market on Sunday. The results should begin to trickle out around 20:00 CEST in Paris, or roughly 14:00 EDT in New York. By the time markets open in New York three hours later, any late results should be declared already and markets will know who is advancing in to the second round of voting on May 7. As the Euro constitutes 57.6% of the DXY Index, there are profound implications for the US Dollar next week as well. –CV
See how the French elections may impact FX markets with the Q2’17 EUR/USD forecast.
Chart 3: DXY Index Daily Timeframe (May 2016 to April 2017)
Turning to DXY, sitting ahead of Sunday’s first-round election for French Presidency, EUR bears have lost their confidence it seems, and EUR has risen for the second week. Given the 57.6% weighting of EUR to DXY, a EUR rally, should we get a post-first-round election bounce, will likely weigh heavily on DXY and could take us below key trendline support from the May 2016 low.
Helping to show EUR resilience, EUR options volumes have decidedly favored EUR calls to EUR puts. Additionally, per Bloomberg, puts expiring after Sunday’s 1st round vote hold a large majority to calls. This skew toward call options looking past Sunday indicates that if the vote outcome favors Fillon or Macron (the two “market-friendly” candidates per a Reuters poll) as opposed to Le Pen or Melenchon, the risk may be to the upside for EUR. This risk aligns with what we see in core European Bond Markets that show Bund put volumes outweighing calls. Bund price downside is correlated to EUR upside. Such EUR upside would decidedly weight on DXY. -TY
--- Written by Paul Robinson, Market Analyst, Christopher Vecchio, Senior Currency Strategist, and Tyler Yell, CMT, Trading Instructor