Spectrum FX Daily Market Update

Euro struggles in spite of French election result

The euro continued to struggle against its major peers on Monday after a difficult week or so that has left the

common currency right at the foot of the G10 performance tracker for April.

The outcome of the French Presidential election over the weekend provided no more than temporary relief for

the euro, which remained pinned below the 1.09 level at the close of London trading. While President Macron

was able to secure the most votes (27.8%), the gap with second-place far-right challenger Le Pen (23.1%) was

close enough to ensure that the run-off vote on 24th April will have at least a modest political risk premium

attached to it. The latest poll of polls suggest that Macron will take 53% of the vote in the second round, which

is not wide enough of a gap for markets to start fully pricing in a win for the incumbent, particularly given the

TV debate on 20th April could swing some of the undecided voters. Until then, we may see a few jitters among

investors, and the euro may find gains somewhat hard to come by.

Meanwhile, headlines out of Ukraine continue to be one of the main drivers of currencies. Intense fighting has

continued, and a lack of progress in peace talks suggest that an end to the war is not on the table in the

immediate-term. The economic impact of the war may not be as bad as first feared (the Euro Area PMIs for

March held up rather well), although the common currency has still reacted negative to the ongoing uncertainty

in Europe. This Thursday’s European Central Bank meeting will present a significant test for the currency. We

expect a hawkish tone, with President Lagarde to announce another recalibration of the APP and open the

door to an interest rate hike in the summer. Expectations are, however, rather high, and it will be interesting to

see how much room there is for an upside surprise.

Sterling has also suffered against a broadly stronger US dollar in the past few trading sessions amid some

dovish comments from Bank of England members at a time when the Federal Reserve looks set to tighten

policy at a very aggressive pace. Some very soft GDP data out on Monday morning far from helped the

pound’s cause. The UK economy expanded by only 0.1% in February, well short of the 0.8% expansion in

January. The slowdown shouldn’t come as a huge surprise - an easing in growth following the post-omicron

boom was expected, although the extent of the slowdown caught markets off-guard as economists were

pencilling in expansion of 0.3%. This week will be an important one of UK data, with the monthly labour report

due this morning, followed by March inflation figures on Wednesday.

The US dollar itself continued to trade around two year highs on Monday, buoyed by the recent move higher in

Treasury yields. The benchmark 10-year rate, for instance, rose to a fresh January 2019 high around the 2.8%

level on expectations that the Federal Reserve will raise interest rates aggressively this year - futures are now

pricing in more than 200 basis points of hikes from the FOMC through year-end. With the next Fed meeting

more than three weeks away, it will be a little while before Powell and co. outline possible tightening plans.

That said, US inflation data out this afternoon, and retail sales on Thursday, may go a long way in guiding the

market as to the size of the next increase in rates. We see a 50 basis point hike in May as highly likely, and even

downside surprises here are unlikely to derail such a move.

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