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DXY Index Stuck in Range; UK Elections Bode Well for Brexit, GBP

DXY Index Stuck in Range; UK Elections Bode Well for Brexit, GBP

Talking Points:

- DXY Index still very much stuck within its range from the past nearly five months, as EUR/USD awaits French elections this Sunday (which are too close to call).

- Snap elections for UK on June 8 likely to give PM Theresa May a significant majority, which will give her breathing room in Brexit negotiations, and thus lead to a "soft Brexit."

- See the entirety of the DailyFX Q2'17 forecasts - important reading for the holiday weekend!

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After a brief rally at the start of April, the US Dollar Index (DXY) finds itself swinging back lower within its consolidation, a range that has carved itself out over the past four-plus months. A lack of significant drivers on the US Dollar side of things, or rather, disappointment among US fundamental drivers, remains the greenback's albatross: the Fed is unlikely to accelerate its rate hike timeline unless fiscal stimulus takes shape, which seems less and less likely for anytime before Q4'17 (if at all this year).

The swing lower by DXY yesterday thus had little to do with the US Dollar and everything to do with one of its constituents, the British Pound. To be clear: the call for snap elections in the UK is a politically savvy move by Prime Minister Theresa May, who has the opportunity to not only crush the opposition Labour party (which is historically unpopular thanks to its hapless leader, Jeremy Corbyn), but also to cut into the SNP's stanglehold in Scotland.

In turn, by building a significant majority in UK parliament, PM May will be giving herself more breathing room when it comes to the Brexit negotiations. As it stands, PM May's cushion of support isn't enough to allow her to deviate away from the Brexit hardliners; however, by amassing a large majority, she can take a softer approach during the negotiations with the EU without risking a revolt within her party that would threaten her power. In turn, this means that the UK probably cedes ground on a number of its more outrageous demands, and finds an easier time reaching an amicable split with the EU.

For traders this week, the announcement of snap elections in the UK is a one-off event; markets seem likely to trudge forward in the days ahead barring more unforeseen developments springing up on the newswire. As covered in the FX Week Ahead piece, there aren't that many 'high' rated events on the DailyFX Economic Calendar that could stoke event driven volatility.

Instead, everyone remains fixated on the outcome of the French election this weekend. The overall frontrunner, 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 50.5% 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.

How could French elections impact the Euro? See our Q2 EUR/USD forecast.

See the above video for a technical review of the DXY Index, EUR/USD, USD/CAD, GBP/USD, CAD/JPY, Gold, and Crude Oil.

Read more: Euro on Edge During Holiday-Shortened Week Ahead of French Elections

--- Written by Christopher Vecchio, Senior Currency Strategist

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.