With the early indications (from Belgian media) pointing to (another) win for the pollsters and, apparently of secondary importance, a win for Emmanuel Macron in the runoff, the question now is whether this will be a “sell the news” event for the euro.
You’re reminded that in the week through Tuesday, specs trimmed their shorts by 19K contracts to damn near flat:
Meanwhile, asset managers are the most long in at least a decade.
Assuming Macron does indeed carry the day, here are the two possible scenarios and what to expect, according to Barclays…
Scenario 1a: Macron victory in line with polls.
A Macron victory in line with polls carries risk of a “buy the rumor, sell the fact” downside move in EURUSD, given the current long EUR pre-positioning. The EUR political-risk premium was reduced significantly by the “benign” first round outcome, which supported a c.2% EUR NEER appreciation. EURUSD should depreciate mildly over the remainder of this year, as monetary policy divergence and some residual political-risk premia weigh on the common currency.
Scenario 1b: Macron victory by a narrow margin
A narrow Macron victory would likely introduce near-term downside risks to our EURUSD forecasts. This outcome would likely remind markets that the risks posed by the ‘Politics of Rage’ have not disappeared and would likely increase the EUR political-risk premium from low levels. Concern about the possibility of a hung parliament in the upcoming French parliamentary elections would likely intensify, raising further questions about the prospects for needed reforms. More directly, concern about the Italian election, expected in Q1 2018 would likely increase, as would questions about the German election, for which polls suggest the Bundestag may have an unprecedented six parties represented following the September election.