How EU Elections Could Impact Euro

Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup May 22, 2019

EU Elections And Their Potential Impact

Keep an eye on because there could be big moves in the currency over the next few days. European elections kick off on Thursday and the rising power of a nationalist Euro-skeptic movement has many investors worried that populist parties could make strong headway. Elections will be held in 28 countries across the European Union for seats in the 751-member European Parliament. This Parliament will make crucial decisions for the Union over the next 5 years that will include border control, national autonomy and Britain’s relationship with the EU. This is the world’s second-largest democratic vote, after India’s general election and while turnout in past years has tended to be low, the races are tight and we could see greater-than-usual participation.

By Sunday, we should know whether anti-EU parties gained enough support to block rather than just slow or impede legislative business. The results could also have a significant impact on upcoming elections in Italy. Rome believes it should be allowed to let its fiscal deficit rise above the commission’s limit and if anti-EU parties see strong support, they could feel empowered to take a more confrontational approach.

While it is widely believed that anti-EU sentiment will be negative for the euro, populism hasn’t necessarily been negative for currencies.
Just take a look at U.S. and Australia – protectionist policies helped rather than hurt the while the surged following last weekend’s surprise victory by Prime Minister Morrison. Populism is spreading and it hasn’t been crushing for any of these currencies.

Does that mean the euro will rise if there’s strong support for Euro-skeptic or anti-European groups? It’s hard to say but what is clear is that we can’t assume that their victory will be negative for the currency. The election results will come slowly, so breakouts could be limited until Sunday when there could be a gap open. Thursday’s Eurozone PMI reports are important but investors have discounted weaker Eurozone growth, so softer numbers may not have much impact on the currency. However if the data improves like economists anticipate, the deeply oversold currency could be vulnerable to a short squeeze or relief rally. Technically, is in a downtrend and that won’t change until the pair closes firmly above 1.1250.

Meanwhile, the selling pressure remains strong for other currencies. fell to fresh 6-month lows against the greenback following softer and a backlash toward Prime Minister May’s withdrawal offer. As reported by our colleague Boris Schlossberg:

Ms. May’s plan appears to be dead on arrival as both Labor and Tories indicated that they would not support her proposal to first approve the customs union deal she negotiated and the possibly consider a second referendum on the matter. Indeed, markets were rife with reports that there was an effort afoot amongst the Tories to push Ms. May out of office as early as Wednesday without even allowing her to put her final effort to a test.

reversed higher despite stronger-than-expected , which confirmed that the Canadian economy is easily outperforming its peers. After seeing record job growth last month, rose by the largest amount since January 2017. Unfortunately, the Canadian dollar succumbed to risk aversion and a nearly 3% slide in as U.S. fell for the second week in a row. The and dollars were also under pressure despite stronger New Zealand . New Zealand’s was scheduled for release Wednesday night and after the prior month’s unexpectedly large increase, the risk is to the downside for this report.

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