Euro Falls as Markets 'Sell the Fact' on Macron Win

  • Reference Rates (8-5-17 - European Trade)
  • British Pound to Euro exchange rate: 1 GBP = 1.1839, up 0.30%
  • Euro to Pound Sterling exchange rate: 1 EUR = 0.8447
  • Euro to Dollar exchange rate: 1 EUR = 1.0963 USD, down 0.34%

The Euro has fallen against its major rivals hours after it was confirmed Emmanuel Macron won the French presidency.

The reaction of the currency has caught some commentators by surprise as many had forecast a significantly stronger Euro on this result.

However, we warned going into the result that the market were expecting this outcome 100% and had perfectly pricec the currency.

As a result, the risk was that traders would 'buy the rumour, sell the fact' and as we move through European market trade this does indeed appear to be the case.

But, the Euro could well rise over coming days after the initial technical repositioning following the vote is done.

"French political risk had been one of the key factors keeping the EUR subdued and its successful avoidance should be worth something for the EUR.  Given our views that another 10-20bp rise in short-dated US  rates won’t be worth much to a severely under-valued EUR/USD, our bias is now to buy EUR/$ on dips. We think investors will look for excuses to take EUR/USD to 1.12, even though the Eurozone calendar is light this week," says Chris Turner, analyst with ING Bank N.V in London.

Indeed, for Macron the hard work is just beginning.

The candidate won with a stonking 66% of the vote but now the real work lies ahead.

The parliamentary elections in June need to return him a strong prime minister, but this is questionable given how young  his En Marche! movement is.

Currency Reactions Limited

The result was expected and as a result the impact on the foreign exchange markets is seen being limited with traders spending the past two weeks calibrating the single currency's value on the outcome.

The Euro rose in initial Asian trade after the result was made clear.

"Only a mild positive reaction expected. Financial markets priced out almost all of the probability of a Le Pen victory following the first round of elections. Consequently, we expect only a mild positive reaction as markets reopen," says Lars Henriksson FX Strategist at Handelsbanken in Stockholm.

Henriksson says the important message to the rest of the EU and the Eurozone is that there is no risk of France exiting any of the two over the nearest five years.

Macron is a strong EU advocate and wants a tighter union, and this should spell difficulty for the UK in upcoming Brexit negotiations.

“With Emmanuel Macron’s widely expected victory now confirmed markets can relax about European politics for at least a few weeks. It is supportive short-term news for risky assets and the euro, but given Macron’s consistent lead in second round polls throughout the campaign, gains in each are likely to be more muted than those seen two weeks ago," says Timothy Graf, head of macro strategy EMEA at State Street Global Markets

Macron’s victory finally gives markets a breather from European politics.

This result, combined with last week’s preliminary Greek debt agreement, will be enough to support a short-term relief rally.

Looking forward, Macron only offers upside surprises says Bill Street, head of investments for EMEA at State Street Global Advisors.

In a do-nothing scenario, Street saws we have the status quo of political paralysis, but with a favourable external environment and steady growth improvement.

"In the goldilocks scenario, Macron gets a working parliament and builds a partnership with Germany to launch meaningful reforms. That would deliver a substantial boost to markets by year-end, which is currently not priced in. In either scenario we could see renewed market pricing for accelerated European Central Bank policy normalisation, especially if the data continues to impress,” says Street.

Macron Bad News for the Pound?

While a Le Pen win was never going to be good for the Euro it was probably likely to benefit the Pound in that the UK would most likely be one safe-haven that would benefit from capital outflows.

So what does a Macron win mean for GBP, specifically?

"The thinking here is that Macron’s victory puts the potential of France leaving the euro zone talk to rest, keeping the EU intact and creating a feeling of solidarity. This could cause a selloff in the GBP as Brexit negotiations get under way," says Stephen Simonis Sr, chief currency consultant for FXDD Global.

The ideal winner from a British perspective was always centre-of-right candidate Francois Fillon.

However, the anglophile 'French Thatcher' was unable to make the grade and instead the UK now faces up to a staunch Europhile. 

Macron’s ideas for Europe include a Eurozone budget (for investment and crisis reaction) accessible for countries respecting fiscal and social rules, as well as a Eurozone parliament and a finance minister.

The UK will find a hostile adversary in upcoming Brexit negotiations who has made it no secret he wants France to profit at the UK's expense.

David Buik at Panmure Gordon has long pushed this view:

Predictions for Big Moves in Euro Unfounded

Ahead of the result there was speculation as to the size of the move in the Euro.

We argued it wouldn't be too too dramatic as a Macron victory is well signposted by pollsters that have proven to be pretty good at their job.

A Le Pen win would have constituted a ‘black swan’ event that would put the Brexit and Trump votes in the shade.

It was always highly unlikely.

Therefore, the Euro has absorbed the news and moves higher were always likely to be well within average brackets.

Indeed, there is a degree of risk-premium in the Euro - the most risk-averse of investors will have held some hedges against a Macron win and these will be closed after the event which should support the currency.

Closing a hedge requires the Euro to be bought, therefore it will rise to an extent.

Some believed there was more risk-premium in the Euro than this and the currency would move further.

“The EUR rise across the board with EURUSD and EURGBP targeting 1.1050 and 0.8650 respectively,” says Rahul Khanna, FX Strategist for TraderMade. “This is because the market will breathe a sigh of relief by moving past a divisive figure like Le Pen.”

EUR/GBP at 0.8650 is 1.1560 in Pound to Euro exchange rate terms.

This would represent a big move if we consider the exchange rate is currently at 1.18!

Analyst Oliver Jones at Capital Economics also sees a big move on a Macron win being announced:

"Given how bonds reacted to the diminished probability of a eurosceptic candidate triumphing after the first round, the French-German 10-year government bond spread might decline to around 25bp if she loses.

"In that event, the euro could also gain ground against the dollar, as it did after the first round. Indeed, on the basis of Chart 2, it might strengthen through $1.12/€."

Such a move in EUR/USD would transpire into an even bigger move in EUR/GBP than that envisioned by Khanna.

But the markets appeared to have called the result perfectly hence the contained moves.