- Macron victory over Le Pen in French presidential elections was widely expected; lack of market reaction shows that the market had the event correctly discounted ahead of time.
- DXY Index has bled through two major support levels, and needs a round of hawkish Fed speakers this week to reignite US yields.
As the dust settles after Emmanuel Macron's victory in the French presidential elections over Marine Le Pen, there has been one noticeable development: a lack of Euro strength. It's not that the Euro itself isn't relieved; it certainly is that the existential threat of a 'Frexit' is now relegated to the sidelines, for now. Rather, FX markets had correctly discounted the results of the second round of voting ahead of time, so there wasn't anything to react to; the results were fully priced-in.
We know that the results were full priced-in, leading us to the quintessential 'buy the rumor, sell the news' outcome in the Euro, given the drop in short-term implied volatility measures between the first and second round of votes. After the first round of the French elections, EUR/USD 1-month implied volatility sank to as low as 7.47%, after trading as high as 13.45% on April 17.
If profit taking is now to going to transpire in the Euro - EUR/USD bottomed on April 14, making the French election EUR/USD long worth just north of +4% - then long-term seasonality factors may be pointed to as the reason why. Over the past 20 years, May has been the second worst month of the year for EUR/USD, and the pair has traded lower in each May during the past seven years. On the other hand, the retail crowd remains net-short EUR/USD, so until positioning flips, we're viewing any dips in the pair as merely profit taking opportunities to reestablish long positions.
Elsewhere, traders should want to keep an eye on the US Dollar over the next few days, as DXY Index has bled through two major support levels very quietly over the past few days. The upcoming slate of Fed speakers may serve as a confirmation that the Federal Reserve will proceed with two more rate hikes this year in June and September, culminating in a shift to their balance sheet reinvestment program in December. With markets only pricing in one rate hike in 2017 per Fed funds futures contracts, the mere appearance of hawkish Fed rhetoric could help reignite long-end US yields, helping buoy the greenback.
--- Written by Christopher Vecchio, Senior Currency Strategist
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