Market Analysis: Market Confidence Expands

Market Analysis: Market Confidence Expands

By Christala Parmaxi, CFTe
Overview

Investors believe that Marine Le Pen will likely be defeated by the market-friendly candidate Emmanuel Macron as Euro’s recovery reveals. The Euro opened with a big gap against its currency counterparties on Monday, and the situation continues as investors are buying the Euro aggressively. The critical level for EURUSD is 1.09 which upon penetration will open the doors for further upside pressure. Investors are confident that the French polls are valid; they show Emmanuel Macron, the candidate that supports the EU, defeating Marine Le Pen by as much as 30% on the final Presidential election round on May 7th.

Before the final round of the French Presidential Election, there is another big event that could shake the Euro; the European Central Bank monetary policy meeting will take place on Thursday at 11:45 GMT. The ECB is expected to maintain its status quo and it will likely remind the investors that it did not adopt the hawkish market reaction yet. The European inflation rate is still far below the Bank’s target and investors’ excitement about the French polls does not come in line with the latter monetary policy meeting announcements and the ECB targets. If the ECB keeps its dovish tone, then the EURUSD is likely to recover Monday’s gap. On the flip side, a neutral tone wouldn’t affect the Euro negatively since the main event that the investors are looking for is the final round of the French Presidential Elections. However, a depreciated currency always helps Central Banks achieve their goals.

In the meantime, on the other coast of the Atlantic, President Donald Trump is going to announce his planned changes on the US tax reform on Wednesday. According to a White House official, the President’s major fiscal plan is to cut US corporate taxes by 15% and decrease income taxes as well. Since the President is going to prioritize the tax cuts over the government deficit, the government debt threshold will need to be adjusted in order to avoid an unfortunate government shutdown. Again, those are plans of the President and not the real case until an official change on the US taxation is being made. Thus, the confidence of investors on the US markets shall be limited in order not to fall victims of the Trumpflation trades once again. But as the story goes, history tends to repeat itself and traders are usually overreacting to new announcements.

The US tax reforms affect the Fed plans as well since an expansionary fiscal policy would drive to Fed’s reaction to protect the already growing economy from overheating. The expectations of a Fed June hike rose to 66% after the reform announcement.

Moreover, President’s plans are affecting the Canadian Dollar as he announced a new tariff on imported softwood lumber from Canada ranging from 3% to 24%. The Canadian government said that they would sue if it deemed required to protect the country’s interest, although they are ready to negotiate for a solution that would benefit both countries. The USDCAD surged to 14-month high today due to Trump’s plans and the falling oil price.

While the uncertainty flows away from Europe and US, the safe haven instruments have lost their upside lead. The Japanese Yen fell against the US Dollar with the USDJPY reaching as high as 110.4 at the time of writing while the gold went as low as 1265 against the US Dollar. The Yen is out of favor not only due to the limitation of the uncertainty but due to the difference between the policy stance of the Bank of Japan and the Fed. While the Fed is considering 3 rate hikes in 2017 and the odds are in favor of a June hike, the BoJ is expected to remain on hold and keep the monetary policy easy until the inflation target of 2% is reached as Governor Kuroda said. Moreover, the US Dollar is becoming stronger due to the tax policy expectations and the commodity currencies are depreciating, which both facts contribute to the appreciation of the USDJPY.

Technical View

USDJPY

As the gap between the monetary policies of the US and the Japan widens, the investors are more willing to buy the USDJPY instead of selling it. The pair did not manage to cover Monday’s gap, despite expanding its gains up to the 2-week high of 110.7. Furthermore, the pair crossed to the upside the SMA100 and is heading upwards to SMA200 which is near the next valid resistance level of 111.3. This level is the latter high of the 4-hour downtrend and since the pair did not break the downtrend channel yet the bulls need to be careful around this level. If USDJPY breaks above this resistance then the next valid target is near 112.2. MACD and RSI are both indicating bullish signals while ADX is on positive directional movement levels. To the downside, the risks are around the psychological support of 110.

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