Geopolitical risk continues to influence market sentiment with safe haven assets in high demand. Gold and yen have been the main benefactors of late and gold this year has already climbed 11 percent. Tensions have risen on the back of North Korea’s missile tests over the weekend and we expect this tension to continue to remain buoyant in the near term. Global equities and the dollar have both been causalities of this negative sentiment, while US treasury yields also fell to new 5 month lows. The dollar and treasuries sentiment were hurt on the back of Friday’s poor economic data figures from the US, with Retail Sales dropping more than expected last month, 0.0% versus 0.2%, while annual core inflation slowed to +2.0%, the smallest advance since November 2015.
Staying on the topic of volatility where this week we have the first round of the French Presidential elections. The front-runners of Macron, Le Pen, Fillon and Mélenchon are all tightly positioned. If recent polls are anything to go by, and no candidate wins 50% of votes in the first round then a second round will take place between the two highest candidates. Both Macron and Le Pen are favorites to go head to head in the second round which would be scheduled for a fortnight later.
On the economic data front it is relatively quiet for the 3 major crosses with only the US having some minor releases in housing. On the currency front we saw GBPEUR break back above the 1.18 level (EURGBP.8475) where it failed to hold on its last two attempts however, the French elections may provide the boost its needs to continue to climb here. The euro has also been selling off against the dollar after trading as low as 1.0570. Its next major resistance are at 1.0675 and 1.0690, it’ll need to break out from these levels before it begins to test the 1.07. Again polls from the elections will be key in the direction the euro takes here. Further gains by the two centrist candidates Le Pen/ Mélenchon would see a general sell off in the euro. With both candidates running a combined support of over 40 percent, there is a genuine concern here for the euro, which is being priced into options pricing.