How EU Elections Could Impact EURO

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EU Elections & Potential Euro Impact

Daily FX Market Roundup May 22, 2019

Keep an eye on EURO because there could be big moves in the currency over the next few days. European elections kick off on Thursday and the rising power of a nationalist euro-skeptic movement has many investors worried that populist parties could make strong headway. Elections will be held in 28 countries across the European Union for seats in the 751-member European Parliament. This Parliament will make crucial decisions for the Union over the next 5 years that will include border control, national autonomy and Britain’s relationship with the EU. This is the world’s second largest democratic vote, after India’s general election and while turnout in past years tend to be low, the races are tight and we could see greater than usual participation.

By Sunday, we should know whether anti-EU parties gained enough support to block rather than just slow or impede legislative business. The results could also have a significant impact on upcoming elections in Italy. Rome believes that they should be allowed to let their fiscal deficit rise above the commission’s limit and if anti-EU parties see strong support, they could feel empowered to take a more confrontational approach.

While it is widely believed that anti-EU sentiment will be negative for the euro, populism hasn’t necessarily been negative for currencies.
Just take a look at US and Australia – protectionist policies helped rather than hurt the greenback while the Australian dollar surged following this weekend’s surprise victory by Prime Minister Morrison. Populism is spreading and it hasn’t been crushing for any of these currencies.

Does that mean the euro will rise if there’s strong support for Eurosceptic or anti-European groups? It is hard to say but what’s clear is that we can’t assume that their victory will be negative for the currency. The election results will come slowly, so breakouts could be limited until Sunday when there could be a gap open. Thursday’s Eurozone PMI reports are important but investors have discounted weaker Eurozone growth so softer numbers may not have much impact on the currency. However if the data improves like economists anticipate, the deeply oversold currency could be vulnerable to a short squeeze or relief rally. Technically, EUR/USD is in a downtrend and that won’t change until the pair closes firmly above 1.1250.

Meanwhile the selling pressure remains strong for other currencies. Sterling fell to fresh 6 month lows against the greenback following softer inflation data and backlash towards Prime Minister May’s withdrawal offer. As reported by our colleague Boris Schlossberg, “Ms. May’s plan appears to be dead on arrival as both Labor and Tories indicated that they would not support her proposal to first approve the customs union deal she negotiated and the possibly consider a second referendum on the matter. Indeed, markets were rife with reports that there was an effort afoot amongst the Tories to push Ms. May out of office as early as Wednesday without even allowing her to put her final effort to a test.”

USD/CAD reversed higher despite stronger than expected retail sales. This report confirms that economy is easily outperforming its peers. After seeing record job growth last month, consumer spending ex autos rose by the largest amount since January 2017. Unfortunately the Canadian dollar succumbed to risk aversion and a nearly 3% slide in oil prices as US crude supply fell for the second week in a row. The Australian and New Zealand dollars were also under pressure despite stronger New Zealand retail sales. New Zealand’s trade balance is scheduled for release tonight and after the prior month’s unexpectedly large increase, the risk is to the downside for this report.

Kathy Lien
Managing Director

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