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The conventional wisdom was proven right in France last night, and another political earthquake averted. Macron looks likely to win the French presidency in the runoff vote on May 7.
Macron is the most pro-EU of the major candidates, and his ultimate victory will throw a comforting blanket over the European establishment, who had been spooked by Brexit and Trump.
It will also pave the way for ECB policy tightening in the second half of the year. As a result, the euro has taken heart from the election results, though the break through the previously highlighted key resistance at 1.0860 is not yet decisive.
We think that the ECB meeting this week will acknowledge upside risks to the near-term growth outlook. We expect the ECB to leave its policy rates unchanged and to make no new announcements on its asset purchase programme. It has already announced a reduction in monthly purchases to €60bn from this month.
The downside bias to interest rates and the exit sequence in the ECB’s forward guidance are expected to be left in place. Hence, President Draghi will emphasize that the policy stance remains unchanged for now.
New economic projections in June will enable the ECB to better reassess the balance of risks for economic growth and inflation. Current indicators point to upside risks to growth, but the sustainability of inflation close to the ECB’s goal is not yet assured.
There are also the BoJ and Riksbank policy meetings this week. Although there is the broad consensus of no change to Riksbank policy this week, we see growing risk of a shift in its policy stance in coming months.
We have budged into a consolidation phase under 1.0935/50 speed line and Fibonacci resistance. Ahead of the ECB, it’s hard to see a strong move developing, but rate spreads are currently supporting the EUR, so while over 1.0790/45 support momentum and the bias has to remain bullishly aligned. Above 1.0950 sees little important resistance till 1.1080-1.1130 region. A decline through 1.0740 would revert us back to the lower range process.
