An End to a Week. The EUR in Focus with an Eye on the Pound

It’s likely to be a relatively quiet day in Europe in the day ahead, with the French elections on Sunday now centre stage for the markets, before shifting focus to noise from the Oval Office and the prospects of a 2^nd attempt at repealing Obamacare, tax reforms and a lifting in the U.S debt ceiling, which are all expected to roll out ahead of the British General Election on 8^th May.

We saw European equities rally on Thursday, with the CAC jumping 1.48%, though rally coming off the back of Thursday’s polls which had shown Macron extend his lead in the penultimate polls to 25% of the vote, with Le Pen sitting back at 22%.

There’s been plenty of debate over what could shift sentiment in favour of Le Pen late into the campaign trail and domestic security was certainly one and with the tragic event in Paris on Thursday evening, the markets will need to consider the possible impact of continued risk and lack of border protection on voter sentiment going into Sunday’s election.

Things could have been much worse, but it was bad enough with the loss of life a reminder to the EU of the effects of open borders and immigration policy that has largely been attributed to the rise of the populist parties.

Perhaps unsurprisingly, the CAC has kicked off the day in the red, giving up some of Thursday’s gains, while the DAX holds steady, while the EUR has managed to eke out more gains on the day, with macroeconomic data out of the Eurozone limited to prelim April private sector PMI figures.

France’s manufacturing and services PMI figures hit 72-month and 71-month highs respectively according to today’s figures, which provided the EUR with support as economic growth continues to accelerate in France ahead of this weekend’s elections, while Germany’s manufacturing and services PMI figures were slightly weaker than back in March, which pulled held back the EUR from another bounce early in the European session.

While the EUR is expected to be under pressure going through the day, Dollar weakness is certainly not helping with the Dollar Spot Index down 0.07% at 99.713 at the time of the report.

While we saw treasuries pick up on Thursday, following talk of the Republicans being willing to lift the debt ceiling and expectations of successful tax reforms, there remains a lack of conviction on whether Trump will be able to unify the Republican Party, which looks to have found little reason to join forces and deliver on Trump campaign promises, doubts over whether administration will be able to get the buy-in on border taxation a key consideration, not to mention where the money will come from to cover the anticipated cost of tax reforms.

Across the pond, there’s certainly plenty to consider in the weeks ahead, with the British Government now preparing for a snap general election in early June. Bank of England Governor Carney spoke on Thursday of his comfort that financial institutions were well placed to handle a general election, though it’s unlikely to be the General Election itself that the markets will be concerned with, but the risks of a shock result, however unlikely with the Labour Market in disarray since last year’s EU referendum.

Perhaps of more interest today will be macroeconomic data out of the UK, which includes March’s retail sales figures, with the numbers expected to provide the BoE with more evidence on whether inflationary pressures are expected to weigh more heavily on the UK economy. With the BoE having to now consider, not only Brexit, but also a General Election, we are unlikely to see the Bank consider a move before the election result, with the recent jump in the pound easing inflationary pressures to a certain degree over the near-term.

Forecasts are for retail sales to ease in March, which will be considered a negative for the pound this morning, weak figures and the uptick in the pound providing the BoE with more reason to maintain its neutral monetary policy position over the near-term.

At the time of the report, it’s pretty flat in the currency markets with the EUR up 0.04% at $1.07218 and cable up 0.06% at $1.28211, while the Dollar Spot Index is expected to find support later in the day, with private sector PMI figures out of the U.S forecasted to improve in April, coupled with a rebound in existing home sales.