Monday, May 27, 2019

Euro and Pound open higher after the European elections but their outlook remains bearish

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MORNING BRIEFING

Politics drive the price action at the start of the week with the Euro and the Pound opening higher on the back of the European elections' results and the Brexit developments. The shared currency seems to have benefited from the weaker-than-feared advance of EU-skeptic parties during the weekend election while Sterling holds on its own in expectation of the next British PM. The Dollar remains unfazed by the political mood swings across the Atlantic but suffered on weaker domestic data. Equities ended the week on a positive note, alongside Gold that edges above $1,285 this morning with Oil consolidating around $58.

The European elections over the weekend didn't turn up to be a landslide win for the Euro-skeptic parties as many analysts feared. Far-right parties won in France and Italy but their overall participation in the European Parliament is expected to decrease to 29% from the current 30% level. This means that the status quo in Europe will not change but does that mean that the Euro will gain? It remains to be seen but the negative bias - in light of a dovish ECB and domestic weakness in the Euro area - should persist. Currently prices for the shared currency are hovering above 1.12 but if the Dollar picks up pace again, the 1.1150 area will come into focus.

Sterling pushed higher on the back of Theresa May's announcement that she will resign on June 7th. Nigel Farage's Brexit Party did win in the European elections but the total amount of votes in favor of the pro-Remain and pro-soft Brexit parties got the majority of the ballots, suggesting that sentiment in the UK is still divided. However, the key question here is who will Conservatives elect to lead them now. If they choose someone like Boris Johnson - who appears as the favorite right now - then the odds of a no-deal scenario will mount again and the Pound will suffer. Even though Sterling is trading above 1.27 this morning, the path of least resistance points lower with the 1.26 area likely to be test again soon.

The Dollar ended last week on a low note with Treasury yields declining pushing the US currency lower. Having said that, the greenback's retreat appears to be temporary as the relative over-performance of the domestic economy versus its peers should keep the Dollar well supported in the medium term. The release of the US Consumer Confidence report tomorrow is a near-term risk, if the data prints weak, but with the Fed not kicking off any discussions around lowering interest rates we expect the currency to remain in demand.

Gold rallied towards the end of the previous week, coming off its $1,270 lows and prices have kicked off trading around $1,285 this morning. The yellow metal's price action will hinge on how the Dollar will trade going forward so, even though tomorrow's US consumer date might put some pressure on the greenback, we think that the currency should be able to hold on its own and thus keep Gold capped. Oil is hovering around $58 and a bounce from here points towards the $60 level; otherwise, the next level of support comes in around $3 lower from its current price.

Equities ended the week on a positive footing and this morning futures in Europe are pointing higher. The US and UK markets are closed due to the Memorial Day and Spring Bank holidays but the rest of the equity indices seem to be on an upwards trajectory. The takeaway from the European elections was not as bad as initially feared with populism not altering the status quo so a near-term risk for stocks has been avoided.

MARKET EVENTS TO WATCH

  • UK Spring Bank holiday
  • US Memorial Day holiday

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research