STO Fundemental - As Europe goes to the polls, Euro looks defiant.

In terms of scheduled economic announcement we have a relatively quiet start to the week, although the political agenda remains very much in focus. The election season kicks off in Europe with Dutch voters heading to the polls and although there’s no significant upset expected, a pivot to the right could be cause for concern ahead of next month’s French elections. We also have the potential for more narrative from Donald Trump – that tax reform remains an outstanding item, although with concern this could tip the entire country into recession, perhaps there’s no rush to see it tabled. It does however mean that the accompanying trading opportunities when it does arrive should be plentiful. Finally there’s the full expectation that the FOMC will hike interest rates on Wednesday, with the accompanying press conference being under close scrutiny – any hint of four increases in 2017 could again lend support to the greenback, drive treasury yields higher and maybe draw a line under this seemingly unstoppable rally for US equities.

The Traders’ View

Running into the weekend break and the our Prop desk was able to profit from some short positions on the DAX although a number of short positions on the S&P remain out of the money. Long EUR/JPY positions have also been proving profitable.

Fundamentals – As Europe goes to the polls, Euro looks defiant.

Last week we noted that the common currency was finding support from the subtle shift in the ECB’s narrative, with a slightly less dovish tone being adopted. This week could again be one of a fundamental change in pace, although with the political agenda being the key driver here. Voters in The Netherlands go to the polls on Wednesday and although the far-right Freedom Party could pick up some more support, with opposition parties having ruled out forming a coalition, they will likely be no closer to power – and critically the European Project will be seen as still in tact. EUR/USD has pushed out to two month highs as the new trading week gets underway, suggesting the market’s support for this position but if we do see a last minute swing in opinion – and the political pollsters appear to be getting worse at forecasting – then with French and German elections to come later in the year, the Euro could see notable weakness in the wake of opinion polls just after 9pm CET on March 15th.

Last week’s gains on the DAX were largely driven by the more upbeat tone adopted by Mario Draghi over the Eurozone economy, but with a strengthening currency, will the upside be sustainable? With Draghi due to speak again at 1.30pm GMT, there’s some speculation he could be keen to try and downplay that positive reaction for the common currency, so failure to achieve this could leave the German benchmark equity index struggling to regain the 12,000 level.

The UK could trigger Article 50 – the start of proceedings to withdraw from the European Union – as soon as tomorrow, but there is some debate as to whether currency markets will react to the news. Opinions point towards the downside having been fully priced in, although there’s an inevitable slug of uncertainty that’s going to be seen whilst the protracted negotiating process is undertaken. However assuming deal makers can go in with a blank sheet of paper and the amendments proposed by the House of Lords are rejected by the lower house, this could strengthen the pound – albeit from a beaten down position. This remains one to watch, but it seems as if the pound won’t really be dictating its own fortunes for some time yet – it’s going to be more about how other economies shape up.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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