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Daily Market Comment – Euro hammered ahead of French election, gold defies the odds



  • Euro continues to sink, cannot capitalize on hawkish ECB signals
  • Dollar prepares to close stellar week, equities claw their way back
  • Gold defies the trading playbook - who is the mystery buyer?
Wounded euro awaits French election

The euro remains the sick man of the FX arena, plagued by war, sanctions, surging energy prices, a slowing economy, and most recently the resurgence of political risk. ECB officials struck a hawkish tone in the minutes of their latest meeting, playing down stagflation risks and warning that higher interest rates are on the menu soon. 

Yet, the single currency could not capitalize. Market participants seem to believe that the ECB can talk a big game but won’t be able to deliver when the time comes, as the darkening outlook for growth limits the scope for aggressive rate increases, even if inflation is raging. 

The next risk event will be the first round of the French election on Sunday. Opinion polls have narrowed with the far-right Marine Le Pen catching up to President Macron, so this is shaping up to be a close race. Implied volatility in euro/dollar options has spiked, reflecting growing demand for protection against sharp FX moves. The bond market tells a similar story with the widening spread between French and German yields. 

Hence, some political risk has been priced in, albeit to a smaller extent than 2017 as an EU-exit is no longer on the table. The first voting round will be telling. If Macron underperforms his polls or Le Pen outperforms hers, that could deal another blow to the battered euro when markets reopen on Monday. On a more cheerful note, the ECB will also meet next week and could telegraph an earlier rate increase.

Dollar keeps going, stocks bounce

Of course any analysis of the euro is incomplete without examining the opposite side of the coin, which is the US dollar. The dollar index is knocking on the door of the 100 region, set to close the week with stellar gains as traders remain confident the Fed will raise rates with a vengeance, pricing in a federal funds rate of around 2.5% by year-end. 

Beyond the troubles in Europe and Fed rate bets, another factor adding to the dollar’s allure has been the slowdown in China, which has clipped the wings of high-flying commodity currencies. 

Elsewhere, Wall Street closed a volatile session in the green on Thursday. Nothing has really changed in the investment landscape, with the threat of fading central bank liquidity casting a long shadow over risky assets. Still, bargain hunters are testing the waters, undeterred by the carnage in the bond market and a potentially messy earnings season ahead. 

Gold defies all odds

One of the biggest puzzles in financial markets lately has been the almost mystical resilience of gold. The precious metal is set to close the week with minor gains, defying the gravitational pull from an appreciating dollar and the relentless rally in real yields, which are approaching positive territory. 

It seems like some player with deep pockets is gobbling up all the available supply of gold, and since the latest CFTC data show no real interest from hedge funds lately, this mystery buyer is most likely a central bank.  

As for today, the only top tier release is Canada’s jobs report for March. Forecasts point to another solid batch of data, which could seal the deal for a 50 basis points rate increase by the Bank of Canada next week. 

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