SENTIMENT CAUTIOUS IN FRONT OF FRENCH PRESIDENTIAL ELECTION

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Market Overview

Trading sentiment is increasingly cautious in front of Sunday’s first round of voting for the French Presidential election that is too close to call. Key forex and equity markets are consolidating, with the euro steady, DAX and CAC trading only marginally lower and gold also very much in wait and see mode. An ISIS-claimed terrorist attack in front of the French Presidential election was always a high risk and it will be interesting to see if it makes a difference in the polling for the anti-immigration Marine Le Pen. The shooting of a policeman in Paris last night could play a role in swaying voters however it is not immediately obvious that the stable, statesman-like Macron would suffer over the populist opportunists such as Le Pen or even Melenchon. With so many variables according to the polls, traders do not appear willing to take a view in front of Sundays vote and the volatility is likely to be seen early next week.

Wall Street rallied strongly into the close last night with the S&P 500 +0.8%, with Asian markets also positive (Nikkei +1.0%). European markets are though far more cautious, all trading mixed around the flat line. In forex there is a similar picture developing with almost no direction to speak of across the major pairs, although just as the European session is taking hold there is the slightest air of dollar weakness. Gold is also in consolidation mode early today, trading just $2 lower, whilst oil has just started to stabilise a touch after several days of selling pressure.

Traders will have plenty to keep them entertained in the early part of the European session, with the Eurozone flash PMIs initially in focus. Expectations suggest that French and German PMIs will hold up on both manufacturing and services. This should mean little real move for the Eurozone flash Manufacturing PMI at 0900BST which is forecast to dip slightly to 56.1 (from 56.2) and the Eurozone flash Services PMI to stick at the 56.0 from last month. UK Retail Sales at 0930BST are expected to drop by -0.4% for the month on an adjusted ex-fuel basis meaning that the year on year data to be trimmed back to +3.9% (+4.1% exp). Canadian CPI inflation at 1330BST is expected to be +0.4% for the month but would be dropped to +1.8% for the year (from +2.0%). US flash Manufacturing PMI at 1445BST is expected to improve to 53.9 (from 53.3) whilst the US flash Services PMI is expected to dip slightly to 53.7 (from 53.8).

Chart of the Day – EUR/JPY

With the euro pulling higher on Macron’s positive polling as the French election becomes imminent, this has helped to drive EUR/JPY into a recovery phase. Four strong bull candles now threatens to completely change the outlook which has been trending lower over the past six weeks. However, a pullback late in yesterday’s session could now question this recovery. The move had looked to threaten the confluence of the underside resistance of the long term uptrend and the resistance of a six week downtrend, but the initial test was sold into. However, today’s session could be one of consolidation, but this could all change on Monday as a market positive outcome (Macron leading the first round poll) could help to drive an upside break. The momentum indicators are also now improving. The Stochastics have given a near term bull signal, whilst the MACD lines are also now both crossing higher. A test of the resistance at 118.20 could also be on. If the market can pull above the resistance of the overhead supply from the key February low at 118.20 then the bulls would certainly be in a far more positive position. The hourly chart reflects the improving outlook, trading above rising moving averages, positively configured momentum and a series of higher lows. The initial support is in the band 116.50/116.95 with 115.75 now key to the near to medium term recovery. Yesterday’s high is resistance at 117.80 whilst above 118.20 opens 118.80.

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EUR/USD

The bulls will be concerned by the late decline in yesterday’s session that pulled the market around 55 pips from the day high to close around the low. This has subsequently formed something close to a shooting star one day candlestick pattern. This would be a bearish pattern if followed by further moves to the downside today. However, although it is still very early, signs are that in the final day of trading before the French election the market could well be running into a consolidation day. The bulls would still be keen to hold on to the support band $1.0680/$1.0710 however hourly indicators are showing little real momentum for direction as yet. The outcome of the French election could be pivotal for the near term euro direction and given the uncertainty, traders may find little reason to take a view. Resistance is now $1.0777.

eurusd-21042017

GBP/USD

Since the breakout above $1.2775, Cable has been looking to build a new basis of support. The last two sessions have been looking to balance the market rather than continuing the push higher. The original breakout was on the political events in the UK and this could continue to drive sterling. However the resistance at $1.2905 has held for the past couple of sessions now and is subsequently growing in importance. The hourly chart shows a basis of resistance also tighter at $1.2860. However it is also interesting to see that the bulls do not want to give up the breakout either. A test of the $1.2775 support was briefly breached to $1.2765 but quickly regained and is now holding. Hourly momentum has unwound and is developing something of a consolidation. A decisive breach of $1.2775 opens a previous breakout back within the range at $1.2707. The bulls will be looking to break above $1.2905. to open the psychological $1.3000.

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