Markets in a party mode, will the ECB stop the music

April 25, 2017 09:32 AM

The positive momentum was driven by the outcome of the first round of voting in the French presidential elections extended into its second day. It now appears that investors are confident that Macron will be France’s next president and will win the battle on 7 May easily.  Investors who lost confidence in pollsters after they failed to predict the outcomes of the U.S. elections and Brexit vote are all of a sudden viewing them as credible sources of information again. As a result, the French CAC rallied more than 4% to hit its highest levels since 2008, French bond yields declined sharply and the euro jumped to a five-month high.

The importance of this one single event was reflected in asset classes across the globe, but whether this rally will have legs depends on how big Macron wins. Macron would need to win by a margin of more than 60% in the second round to unite a divided country and ensure that the spread of populism ends in France.

With concerns over the French election diminishing, traders will shift their attention towards monetary policy. While no changes to asset purchases or interest rates are expected during Thursday’s ECB meeting, Mario Draghi’s tone is what’s going to guide the euro. Leading economic indicators have seen a fair improvement within the Eurozone, but inflation levels that have slipped to 1.5% in March from 2% in February are likely to keep Mr. Draghi on the defensive. I don’t expect much from this meeting, other than a reiteration of past statements, which is likely to cap Euro gains for now. Any hint of normalizing policy will push Euro above 1.10. However, I think this scenario is highly unlikely.

Before the ECB meets on Thursday, Trump is due to deliver a “big announcement” on tax reforms. I’m becoming little concerned over the President’s big announcements, especially since we haven’t seen any major legislative achievement so far and he will be marking his 100th day in the White House this Saturday. I believe that a repeat of the healthcare reform failure will end up sending the Euro above 1.10 without the need of ECB’s support.

About the Author

Hussein Sayed is chief market strategist at FXTM.