Our bottom-line view based on the snap elections thus far is that this is a temporary modestly EUR/USD bearish factor rather than a harbinger of a large multi-cent decline. Even though the situation remains fluid, the key issue for markets is the possible fiscal implications from a Le Pen majority rather than an existential one, such as potential Frexit which was the main source of contention in early 2017, and thus higher intensity. The French general government deficit reached 5.5% of GDP last year which puts France on the Excessive Deficit Procedure list. And according to new EU rules that will kick in next year, France will need to make a 0.5% structural deficit adjustment per year until the overall deficit comes below 3%.
Once the dust settles on the elections, market focus will likely gravitate towards widening EU-US rate differentials which is usually euro-supportive. But the EUR/USD recovery will also be capped on the upside (range is still expected to be 1.05-1.10) as we are also cognizant that the upcoming US elections is going to reduce confidence in any growth recovery outside the US given the prospect of trade conflict/ tariffs. The US Presidential debates on 27th June and 10th September will be key events.
EUR/USD near-term targets are left unchanged at 1.05. 1-year ahead target unchanged at 1.12 but with low confidence. Stay short EUR/USD through options.- J.P. Morgan FX Strategy
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