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Something to Consider Before Trading EUR/USD Gap, SPX Charge, Dollar Breakdown

Something to Consider Before Trading EUR/USD Gap, SPX Charge, Dollar Breakdown

2017-04-25 03:05:00
John Kicklighter, Chief Currency Strategist

Talking Points:

  • The French first round election ended with the anticipated two candidates moving to the early May run off
  • Relief was felt in the Euro and EUR/USD as a French EU referendum or abandonment of the Euro seemed far less likely
  • Expecting follow through on the Euro or 'risk-on' after this development and ahead of a dense docket is unlikely

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There was little mistaking the mood of the market to start this week. The Euro surged Monday to produce the biggest EUR/USD gap on record - at least going back to the official start of its trading. Motivation for the surge was equally accessible. The first round of the French election ended with the most heavily anticipated outcome: a runoff between Centrist Marcon and far-right Le Pen. While this means that the candidate who has threatened to bring EU referendum to France and abandon the single currency is still in the running, the statistics have significantly shifted out of her favor. The question is how much lift this move can be expected to provide. Is the reduction of the 'worst-case-scenario' for the Euro's future motivation enough to sustain a lasting bullish trend? Alternatively, is the jump so limited that opportunistic technical traders will simply 'fill the gap'?

Wider market conditions are certainly prone to revert to range. However, the case for the Euro is similar in nature to the British pound post-Brexit. The Sterling collapsed Friday following the results of the poll and went on to further gap lower over the weekend. After 10 months, the British currency has yet to fill the gap - much less cover the initial plunge - and for good reason. The fundamental development was a discount in value that isn't temporary in nature. While the Euro's jump certainly doesn't come with the same degree of intensity as the Pound's slide, there is a comparable change in value versus a temporary shift in price. Even if the shift is more permanent, its limitation for drive and the congestive nature of the markets can act to pull EUR/USD, EUR/GBP and EUR/AUD back into range. The reaction from 'risk'-oriented markets is perhaps more prone to the reversion.

Next to the Euro's performance to start the week, the rise in global equities, Yen crosses, high-return alternative assets and other markets prized for yield marked impressive progress. A temporary halt to the spread of protectionism in Europe offers lift for for benchmarks like the S&P 500. Yet, the reach of this event all the way up to the atmosphere of broader sentiment is even more difficult to sustain. What's more, the start of the week has only scratched the surface of the event risk due this week. We have in the upcoming 24 hours a range of indicators topped by the US consumer sentiment survey from the Conference Board. Wednesday, the hard-hitting themes start. The BoJ rate decision tests the dovish extremes, the Brexit discussions begin in earnest and the Trump administration is due to unveil tax reform outline. The following day, we move into the ECB rate decision, key US earnings and high level economic data. Then our week ends with a run of 1Q GDP figures and the possible shutdown of the US government due to funding trouble. What opportunity offers false promise and what can offer charge for trade? We discuss that in today's Trading Video.

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