The Forex market opened mixed after the first round of the French presidential elections. A worse case scenario for the Euro and for the European project has been avoided.
Mr. Macron and Mrs. LePen will meet in the second round, two weeks from now, and Macron is favorite. It is still early and it is a long shot, but markets reacted with a relief rally.
Euro opened higher with a gap on all the currency pairs. EURUSD opened above 1.09, EURJPY well above 120, only to mention two of the most important Euro pairs. The other risk-on pairs followed suit, like the USDJPY that gapped higher as well.
While the majority of the gaps are still open at the time this update is written, we should focus on the events ahead of us to see how to position next. The U.S. dollar is key in the days ahead.
Friday we’ll see the U.S. GDP being released. The Atlanta Fed GDP tracker points to a lower release, but nothing can be ruled out when it comes to how the market is going to move. Remember last time the Fed hiked rates? The dollar sold on the news.
Until the GDP in the US, the ECB (European Central Bank) is meeting on Thursday. While the improvements in the European economies are obvious, there is not enough for the ECB to be hawkish.
Core inflation slipped this month to 1.5% and it is not in line with the long-term ECB expectations. If the ECB will set the tone for a monetary policy shift, this will be seen in June. Until then, expect dovishness from Draghi and Co.
What next? Trump’s administration announced that this Wednesday it will release the tax cuts plan. Corporate taxes are about to be slashed to 15%. This would be a big boost for the U.S. economy and it could trigger a massive dollar buying frenzy.
Such a move, combined with another stimulus, will see the economy overheating. This will lead to the Fed hiking faster than intended, even if the hikes will be for the wrong reason. In the end, the interest rate differential is the only thing that matter in Forex trading.
Until we’ll know more about Trump’s administration plans, we’re bound in ranging markets. USDCAD and EURUSD are ranging for more than a year now, while USDCHF is doing the same. Positioning for the break is key moving forward.