Existential fears resurface over EUR as elections loom
The EUR is once again heading towards one of those awful existential moments as populists will have another opportunity to threaten the EU and the Eurozone in upcoming general elections.
With populist parties feeling more emboldened than ever thanks to Donald Trump’s election victory in the US and Brexit in the UK, leading to investors and traders becoming nervous about the EUR and have been selling it.
But the latest up move by USD vs EUR was down to Trump’s promise of “phenomenal” tax reforms due in two to three weeks and the resignation of Dan Tarullo, a US Fed governor and a proponent of tough banking regulation. Taken together this all looks very pro US growth, higher interest rates and bullish for USD. Of course, this then must be delivered upon.
However, a potentially more fundamental issue for markets are the upcoming elections in the Netherlands, on March 15 and the French elections starting April 23. Both have potential to wreck the Eurozone if nationalist parties win either election. The Dutch anti-EU and anti-immigrant politician Geert Wilders leads in the polls, but is unlikely to get into power as the Dutch political system favours coalition governments. There’s a strong possibility he’ll be side-lined from power by more moderate parties.
In France, the situation is more complicated. The two establishment parties now appear to be out of the election with French Presidential contender Francois Fillon tarnished by scandal. An incredible situation, a little like an election in the UK where neither the Conservative or Labour party are in the running to form the next government.
This leaves Marine Le Pen’s, anti-EU National Front party and Emmanuel Macron, a former civil servant and investment banker, with his own new party who promises to get France working again. On the plus side, he is much more moderate than Le Pen, supports the European project, but on the minus side he does look like an establishment figure repackaged as something new.
The markets are hoping that Le Pen and Macron will be facing each other off in the second round of the elections where with the support of centrist voters he will win. Though the likely outcome, it is not a foregone conclusion. France is deeply scarred by unemployment, terrorism, de-industrialisation, loss of prestige and broken political promises and scandals. In other words, the French might just have the appetite for something much more radical and if they vote Le Pen – then the Eurozone is likely finished. At some point this year there will be an Italian election, which is another opportunity for populist anti-EU politicians.
For the EUR, this will spell a period of volatility as the currency falls on nerves leading up to the election, unless the populists lose steam, and recovering once it looks likely that an establishment candidate is going to win or does win.
Ironically, all this is taking place against a much-improved Eurozone economy with the European Central Bank’s stimulus finally working. However, for traders the political situation means there’s more potential downside for the EUR – if there’s a populist victory – than upside. That could take EUR/USD all the way to parity and beyond, whilst establishment victories could propel the pair up to 1.0900-1.1100
One area often overlooked is that in a sense the populists probably have already won, because the establishment parties will turn populist to survive, which does not bode well for European unity.
TECHNICAL ANALYSIS: EUR/USD – election nerves begin to bite
In the end, taking out EUR/USD 1.0900 turned out to be a cent or so too far for the pair. Over the next couple of months EUR/USD could be quite rocky as Trump’s economic agenda takes shape and nerves fray ahead of elections in Europe.
At the moment, support is placed at 1.0530, 1.0454, 1.0407 and 1.0340 with resistance seen at 1.0766-8, 1.0789 and 1.0828. Though the daily RSI is neutral, the pair are starting to challenge the lower Bollinger band suggesting slow progress on the downside if the current trend continues.
However, political events could dramatically wrench the pair in either direction making EUR or USD crosses tricky for traders and making technicals a lot less predictive.
By Justin Pugsley, Markets Analyst, MahiFX