Talking Points:
- A bearish DXY Dollar break Friday seems the motivation of a strong Euro rather than a weakness in the US backdrop
- Though probabilities for the French election Sunday skew modestly towards a weak Euro bull, the bearish threat is extreme
- Top event risk into the coming week includes the BoE and RBNZ rate decisions, US CPI, UofM sentiment survey and G7 meet
What will the French election results mean for the Euro? Will the Dollar's break from range turn to trend with the help of the CPI or UofM sentiment figures? Will the BoE's 'Super Thursday' rate decision revert to a monetary policy focus? Join me for the Weekly Fundamental Trading webinar on Monday on the DailyFX Webinar Calendar.
On the 10th day, the market's broke. Since the initial 'risk on', Dollar drop gaps that followed the outcome of the first round French election; markets have drifted. Nine days of directionless anxiety seemed to end Friday with attempted breaks from the key benchmarks founded on questionable motivation, requires significant fundamental fuel to sustain and ignores considerable event risk during the liquidity drain of the weekend. That doesn't read like a strong risk-reward effort by the speculative rank. Inching higher on expensive and low-return assets is a common sight in the financial markets nowadays. However, when the risk component stretches to such remarkable extremes as exists with French election or equity index scenarios; greater caution should be taken when 'going with the flow'.
The greatest event risk for the coming week will hit before liquidity even fully returns after the weekend. The second round of the French Presidential election is scheduled for Sunday, and the assumptions made by the markets are clear. With the EUR/USD reaching to six-month highs and Euro-based volatility measures deflated, it seems the market is certain that the Emmanuel Macron will triumph. While his policies would bring some change to France, he has threatened little change to the country's position within the European Union and its use of the shared currency. From the FX perspective, that is the equivalent of 'status quo'. If Macron were to come out victorious, the non-influence on the market and heavy anticipation would render the outcome barely market moving. Alternatively, if an upset were to be pulled off by Marine Le Pen - who has vowed a French referendum for EU membership and to abandon the Euro - the impact on the currency would be nothing short of catastrophic. If this were a situation where the alternative were hardly a possibility, complacent Euro exposure would be acceptable. However, the polls behind this event should not draw such certitude.
With an eye on the extreme scenarios of mere 'unlikely' event risk over the weekend, the outlook for the week ahead will need to weigh the conviction in difficult and/or mature developments. The S&P 500's close at record highs this past week will come loaded with the most difficult mantle to carry forward. Given the market has consolidated just below records for nine straight trading days in a historically-tight range, it is difficult to believe that a new phase of bullish momentum is easy to mount in this already expensive market. Fuel for speculative appetite in the week ahead has little of the 'relief rally' or 'dip buying' opportunity in past months. Systemic rise in confidence sees little wholesale change in growth forecasts or returns. Key event risk is more likely to cater to specific markets or currencies with a lurking threat to triggering more substantive risk aversion. Both the Bank of England's (BoE) and Reserve Bank of New Zealand's (RBNZ) rate decisions should be watched for currency impact. In the US the consumer inflation data and University of Michigan consumer confidence survey will speak to different topics of concern for the Dollar and local markets. We look at the systemic bearings behind the financial markets and the key event risk on the docket for the week ahead in this weekend's Trading Video.
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