EUR: European political risks are in focus – MUFG
Lee Hardman, Currency Analyst at MUFG, notes that the euro has weakened modestly during the Asian trading session which has resulted in the EUR/USD rate falling back towards support from its 55-day moving average at around the 1.0600-level.
Key Quotes
“The euro has been undermined by concerns over rising European political uncertainty ahead of today’s Eurogroup meeting. European finance ministers are not expected to reach an agreement to extend financing to Greece as early as at today’s meeting. The market will be watching closely to see what progress has been made following the meeting.”
“The main trigger for the euro’s decline were comments on Friday from French Socialist candidate Benoit Hamon stating that he was open to forming an alliance of the left in the upcoming French Presidential elections. He told Info radio that “what we need to discuss is the conditions under which we could come together and who in the end could - - between Yannick Jadot, Jean-Luc Melenchon and myself - - be best suited to embody the left in the second round of the French presidential race with a program that could be shared”. The comments triggered a sell-off in the French government bond market on Friday.”
“The market is wary that forming an alliance of the left parties would increase their chances of making it through the first round of the French Presidential election. For example, the latest Ifop opinion poll revealed that Hamon received 14 percent of the vote and Melenchon 11.5 percent which when simplistically combined could prove sufficient to reach the second round. In reality even if the parties joined together, it would not necessarily be the case that they would retain all of their combined support. Nevertheless, it is making the market wary that such an outcome could increase the risk of Marine Le Pen becoming President, and would also represent a less market friendly alternative to either Republican candidate Fillon or independent Macron.”
“However, the probability of the left parties forming an alliance is still seen as unlikely. It was highlighted by comments over the weekend from both Socialist candidate Hamon and far-left campaigner Melenchon. Far-left campaigner Jean-Luc Melenchon stated that Benoit Hamon’s campaign was going nowhere and that he wasn’t about to hitch a ride on a socialist “hearse”, while Benoit Hamon hit back stating that “I wouldn’t run after Melenchon, I don’t run after anyone”. It was been reported that both candidates are scheduled to meet this week. The developments add further to uncertainty over the French Presidential election. Independent Macron is still seen as the favourite although his lead over Republican Fillon has also shown signs of slipping over the last week. Overall, we continue to believe that upcoming political risk in Europe will remain a weight on the euro during the first half of this year.”