EUR/USD - Political risks fade; focus shifts to the ECB

EUR/USD clocked a high of 1.0918, but failed to close above August 8 high of 1.0873 levels despite French election relief.

Risk-on triggered by unwinding of hedges

The rally in the EUR and other risk assets on Monday was more due to unwinding of hedges initiated ahead of French elections on fears of Le Pen-Melenchon scenario.

The election is no longer a risk not because Macron came out victorious in the first round, but due to the fact that the polls show Macron is set to win the second round by a big margin. What that means is the anti-EU candidate Marine Le Pen has huge ground to cover, which looks less likely.

Focus on ECB

Market relief after the French vote should see the attention squarely turn to ECB policy. With political risks fading, the speculation of ECB announcing a QE Taper this year is likely to gather pace. That could keep the EUR well bid, especially against currencies except USD. The American Dollar may remain resilient on account of the rally in the treasury yields on Monday.

What’s next for the EUR?

The common currency may rally across the board if the ECB sounds optimistic about the Eurozone growth and inflation trajectory and provides hints of a potential QE Taper this year.

The ECB rate decision is due this Thursday. As for today, the data calendar is light in Europe. US consumer confidence and housing data could influence the dollar side of the story.

EUR/USD Technical Levels

The spot was last seen trading around 1.0860. A break above 1.0873 (Dec 8 high) would open doors for a re-test of 1.0906 (Mar 27 high) and 1.0918 (previous day’s high). On the other hand, a breakdown of support at 1.0829 (Feb 2 low) could yield a sell-off to 1.0775 (5-DMA) and 1.0738 (Apr 21 high).