The Pound to Euro exchange rate’s run higher is expected to be limited we are told.
According to research conducted by ING Bank N.V., the Euro should witness a strong period of appreciation once the French election is done and a mainstream candidate installed in the Élysée Palace.
The call comes at a good time for the Pound which has been rebounding against the Euro since mid-March.
The rebound has had long-suffering Brits looking to sell their Pound’s hope that maybe this time the currency will break into fresh territory above 1.20, but with the Pound to Euro exchange rate still only at 1.1800 the big test is yet to come.
The good news is that by all accounts momentum should stay positive for a little longer.
Our technical studies confirm the Pound enjoys positive momentum which should extend towards recent ranges towards the 1.19 area.
The rally will then be tested by strong resistance in the market as we have noted that in the post-referendum period Sterling does not enjoy trading above 1.20 and has often turned lower in the run up to this level.
Technical analysis of the Pound to Euro rate
We believe the resistance towards 1.20 could also coincide with the French presidential elections – the outcome of which will be incredibly important to the Euro.
Also note our most recent piece on the Euro / Pound exchange rate that reports Standard Chartered are looking to bet on further Pound Sterling for the duration of April.
“The Euro-area has important risk events that could undermine the EUR, particularly in the context of short positioning that is less stretched than in the GBP versus the USD,” says Nick Verdi at Standard Chartered. “A strong showing by Marine Le Pen in the 23 April first round of the French presidential election and a more-dovish-than-expected European Central Bank stance at its 27 April meeting could dent EUR sentiment.”
Strategists at the bank say they expect the GBP to “outperform the EUR over the next few weeks” as a result.
Indeed, for now, “upside for the Euro is on a leash,” says analyst Joe Manimbo at Western Union, who explains the Pound has been able to capitalise on the growing nerves surrounding the Euro ahead of the French vote.
“What had recently been seen as a two-horse race between centrist Emmanuel Macron and far-right Eurosceptic Marine Le Pen has now shown signs of widening to a four-horse field with polls showing improving prospects for leftist Jean-Luc Melenchon and Republican conservative Francois Fillion,” says Manimbo.
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The Mélenchon Threat Keeps the Euro in Check
Most of the discussion around the French presidential election has thus far centred on the risks surrounding a Marine Le Pen win.
But, the rise of Jean-Luc Melenchon could be as disruptive to markets we are told.
“Since the start of the year sovereign stress has begun to anchor the pair as well. Recently, this reflects the emergence of Melenchon as a strong fourth candidate in the election and the pickup in French spreads. Since the recent low marked two weeks ago, the 10y French-German spread has risen 16bp and now sits about 31bp above the 3y average,” says Richard Kelly, Head of Global Strategy at TD Securities.
For the EUR, the balance of risks now rest with the outlook for sovereign debt risk argues Kelly.
“Melenchon shares some of the same populist positions as Le Pen, though he opposes a so-called Frexit. Still, they both question the benefits of the EU and free-trade, so risk assets would be sent reeling if they both advanced to the next round,” says Kelly.
If Le Pen faces Fillon or Melenchon then the implied chances of a Le Pen victory are higher than vs Mr Macron, even if still unlikely.
Meaningful Euro Upside Ahead
But, the time will come when the Euro stages a notable comeback we are told.
“We could see modest build of EUR risk premia ahead of the event,” says Petr Krpata, an analyst with ING in London, with regards to the impending French vote.
But for Krpata risk should be limited and will remain far off the kind of levels suffered by GBP ahead of the Brexit referendum.
For Krpata the assumption is made that Le Pen won’t win and the electorate will ultimately galvanise around centrist Macron.
Of course this is not set in stone but analyst must make calls, and why would you not opt for the statistical favourite?
On a Macron victory there should be some upside to the Euro on offer as that electoral risk that has weighed on the currency is shed.
However, for Krpata the real boost to the Euro will come as markets shift their gaze back the European Central Bank and whether they will finally move forward and withdraw their support to the European economy.
Such a move would be incredibly positive for the Euro.
“Once the outside risk of Le Pen victory is out of the way, there should be fewer hurdles for eventual ECB policy normalisation to be expressed in EUR asset markets. We expect the ECB to signal QE tapering during its September meeting,” says Krpata.
The analyst believes this should trigger “meaningful” EUR upside and the EUR/USD exchange rate should break above the 1.10 level.
As EUR/GBP tends to follow EUR/USD, we would expect the Pound to come under notable pressure against the Euro.
So, should we allow for Sterling to extend its rally against the Euro a little longer, perhaps a move to 1.20 if you are an optimist?
Either way, at such levels we would get nervous as the Euro won’t stay down for long.
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Near-Term: Euro to Remain Pressured as Election Race Remains Tight
Expect the Euro to maintain a soft tone near-term as investor nerves over the upcoming vote intensify.
France’s presidential race looked tighter than it has all year, just nine days before voting begins, as two polls put the four frontrunners within reach of a two-person run-off vote.
The latest voter surveys may raise investor concerns about the outside possibility of a second round that pits the far-right candidate Marine Le Pen against hard-left challenger Jean-Luc Melenchon.
The election is one of the most unpredictable in modern French history, as a groundswell of anti-establishment feeling and frustration at France’s economic malaise has seen a growing number of voters turn their backs on the mainstream parties.
An Ipsos-Sopra Sterna poll showed independent centrist Emmanuel Macron and Le Pen tied at 22 percent in the April 23 first round, with Melenchon and conservative Francois Fillon at 20 and 19 percent respectively.
That 3 percentage point gap separating the top four was within at least one of poll’s margin of error, suggesting the race remains wide open.
Polls have consistently shown Macron would comfortably win the second round should he qualify for the May 7 vote.
But the most striking trend in past days has been the late surge in support for Melenchon, a former Trotskyist who would pull France out of NATO and, like Le Pen, possibly the European Union, too.