EUR/USD inter-markets: looking to close the gap?
EUR/USD is losing ground for the second session in a row so far this week after being rejected from Monday’s YTD tops beyond the psychological 1.1000 handle.
EUR-sellers have quickly turned up at the beginning of the week after the results of the second round of the French elections confirmed what prior polls have been already insinuating in previous weeks: an ample victory for centrist candidate Emmanuel Macron vs. far-right candidate Marine Le Pen.
The old market axiom ‘buy the rumour, sell the fact’ inexorably appeared among traders, sparking the ongoing sharp sell off and at the same time opening the door for a potential fill of the gap higher seen in the wake of the first round of the French elections (April’s 24th low is at 1.0820).
Yields in both German and US money markets have climbed and are so far keeping monthly tops, with the yield spread favouring the buck and in turn sustaining the robust bounce of the US Dollar Index off yearly lows near 98.30 seen in early trade on Monday.
USD stays well underpinned by rising expectations of a Fed’s rate hike at the June meeting, supported as well by positive Fedspeak and solid results as of late. However, in the longer run, the slow-but-persistent recovery in the euro area coupled with now diminished political risks in the region could morph into a more hawkish tone from the ECB at its next meetings, lending fresh oxygen to EUR and maybe starting to build the case for a more sustainable pick up in the cross.
From the positioning side, EUR remains favoured by the speculative community, as net shorts have retreated to marginal levels during the week ended on May 2, as per the latest CFTC report.
All in all, a potential fill of the April gap stays on the cards, although a deeper pullback appears somewhat unlikely, at least in the near term, or until the ECB sheds more light on its future steps.